As sustainability becomes an increasingly important consideration for investors, it’s essential to understand how to evaluate portfolio management strategies prioritizing environmental, social, and governance (ESG) factors. Here are key elements of choosing effective sustainable portfolio management.
What is a Sustainable Portfolio?
Sustainable portfolio management involves balancing financial returns with environmental and social risks across various investment categories. The goal is to create an investment portfolio that supports a business’s long-term growth while protecting stakeholders’ financial integrity.
Investors have two options to establish sustainable portfolio management: positive or negative screening. Positive screening involves actively seeking and investing in organizations promoting sustainability, diversity, and equity. In contrast, negative screening involves avoiding investments in companies or institutions based on their industry or practices.
Key Factors to Look For in Effective Sustainable Portfolio Management
Clearly Defined Goals and Objectives
People have different interpretations of sustainability. Some view it as a way to positively screen for companies that meet specific criteria, like having gender-diverse boards. Others prioritize environmental and social impact and want to invest in companies contributing to those goals.
However, not all sustainable investment portfolios are transparent about how they incorporate sustainability into their process. Investors should seek managers who define sustainability to ensure they know what they’re investing in.
One way managers have approached this is by using the United Nations Sustainable Development Goals (SDGs) as a guide. The SDGs are opportunities that inform investment themes and define a suitable investment universe.
Integration of ESG Factors
In today’s business landscape, it’s essential to recognize the value of ESG factors in evaluating a company’s overall worth. Investors can better understand the financial impact of a company’s sustainability practices by considering elements such as climate risk, diversity, and good governance.
Although third-party ESG ratings have gained popularity as a way to assess sustainability, they have limitations that investors should be aware of. These ratings can vary significantly between agencies due to differing methodologies and may not fully capture a company’s sustainable practices.
To build a sustainable portfolio, investors should work with managers conducting independent research to assess ESG factors at the company level rather than relying solely on third-party ratings. This approach allows for a more comprehensive evaluation of a company’s sustainability practices and can lead to better long-term financial outcomes.
Engagement With Company Management
Engagement requires building a productive partnership to achieve progress in different areas over a prolonged period. This involves cultivating relationships that enable investors to exert their influence and facilitate constructive change, even in contentious domains, while maintaining mutual respect.
This method of engagement demands persistence, patience, and consistent efforts over the years. It is often more effective than confronting companies in convincing them to adopt sustainable practices. Investors can help businesses generate superior outcomes and foster long-term returns by promoting positive change.
Conclusion
To build a sustainable portfolio, investors should seek managers with a clear definition of sustainability and integrate ESG factors into their investment process. Moreover, engagement with company management can help investors promote positive change and foster long-term returns. By considering these factors, investors can create a sustainable investment portfolio that supports a business’s long-term growth while protecting stakeholders’ financial integrity.
