How Investors Integrate ESG: A Typology of Approaches

Sarah Cohn    Kevin Ranney, Trevor David, Doug Morrow, Martin VezĂ©r
07 Jun 2017
Category: ESG

Country or region: Asia Pacific (Overall)

The Investor Responsibility Research Center Institute (IRRCi) commissioned Sustainalytics to develop a report, How Investors Integrate ESG: A Typology of Approaches. The report examines how investors integrate ESG factors into their portfolios, finding that investors are leveraging a diverse set of integration strategies. Based on an analysis of the investment practices of 70 institutional investors with total assets under management of $19.9 trillion, the report presents the first-ever typology for classifying the approaches investors are taking to integrate ESG factors into their investment processes. 

The report classifies ESG integration approaches along three dimensions: management (who is integrating ESG), research (what is being integrated), and application (how the integration is taking place). Each dimension includes key differentiators – for example the degree of centralization of ESG functions within an organization, or the degree to which macro-level sustainability trends (as opposed to individual company ESG factors) are integrated – as the basis for distinguishing between approaches. The report authors used the typology to identify six prevailing approaches of ESG integration in the market today: 1) The Believer, 2) The Cautionary, 3) The Statistician, 4) The Discretionary, 5) The Transition-Focused, and 6) The Fundamentalist.

The report also includes several high-level observations about the current landscape for ESG integration, including:
  • Despite the continued groundswell of investor interest in ESG, limitations defined in investment mandates may be constraining ESG integration.
  • A growing number of large investors are paying increased attention to companies’ sustainability impacts and how these impacts may generate systemic risks that can jeopardize economic value.
  • Access to ESG research and public commitments to consider ESG issues do not necessarily ensure that ESG information is integrated into investment decision-making.

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