FlexShares outlines seven distinct approaches to ESG-related investing currently floating around in the investment community: Negative/exclusion exclude specific securities based on ESG criteria. Positive/best-in-class target positive ESG performance relative to industry peers. Impact investing aim at solving social or environmental problems. Sustainability themed investing selects assets related to sustainability in single- or multi-themed funds. Corporate engagement and shareholder action use shareholder power to influence corporate behavior. Norms-based screenings hone in on investments against minimum standards of business practices based on international norms. Lastly, ESG integration seen as a systematic and explicit inclusion by investment managers of ESG risks and opportunities into traditional financial analysis.
“FlexShares gravitated towards a hypothesis that the best way to innovate in the ESG space is to integrate ESG-related KPIs into an investment strategy. A basic way to do this is to identify the materiality of each key performance indicator. Ideally, material KPIs would significantly impact risk/return with strong predictability,” according to the FlexShares note.
For instance, these key performance indicators may include factors like electricity use, NOx emissions, fatalities per 1,000 employees, community spending, classified board system and size of board, among others. The impact of these KPIs are then evaluated on a sector-by-sector basis since no two sectors are alike and each come with their own idiosyncratic strengths and weaknesses.
For more information on ESG-related investments, visit our socially responsible ETFs category.