ESG 101: What is Environmental, Social and Governance? Header
Explore the basic fundamentals of ESG investing
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- What is ESG?
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What is ESG?
What is ESG?
ESG investing is a term that is often used interchangeably with sustainable investing, socially responsible investing, mission-related investing, or screening.
Remy Quote
At MSCI, we define ESG Investing as the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.
Remy Briand, Managing Director, MSCI ESG Research
What are the common investor objectives?
What are the common investor objectives?
When it comes to ESG investing, one size does not fit all. Under the ESG investing umbrella, we have identified three common investor objectives or motivations when considering an ESG strategy: Integration, Values and Impact.
In order to achieve these objectives, investors may pursue different approaches such as ESG integration, exclusionary or negative screening, or thematic investing, to name a few. Here we share the differences between socially responsible investing (SRI), values-based investing, impact investing, and other commonly used terms in the market.
What are the common investor objectives?
Integration
Integration
Values
Impact
Objective:Investing with a systematic and explicit inclusion of ESG risks and opportunities with the intention to enhance long-term risk-adjusted returns. |
Common approaches: |
Bottom-up ESG integration
Investing with a systematic and explicit inclusion of ESG risks and opportunities in investment analysis.
Top-down ESG integration
Investing with a systematic and explicit inclusion of ESG factors in portfolio construction.
Best-in-class selection
Preferring companies with better or improving ESG profiles relative to sector peers.
Thematic investing
Investing based on trends or structural shifts, such as social, industrial and demographic trends.
Active ownership
Entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change.
Objective:Investing in alignment with an organization or individual's moral values and beliefs. |
Common approaches: |
Best-in-class selection
Preferring companies with better or improving ESG profiles relative to sector peers.
Exclusionary or negative screening
Avoiding securities on the basis of an organization or individual's values, standards and norms, or other ESG considerations.
Active ownership
Entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change.
Socially responsible investing (SRI)
A traditional umbrella term that can be used to describe a values-based approach to investing, with an eye towards reducing exposure to negative externalities. Also known as "ethical investing" or "norms-based investing."
Faith-based investing:
Aligning investments with faith-based values. Faith-based investing often involves avoiding investments in companies whose business activities are viewed as violating the teachings of a given faith. It may also include aims to generate measurable social (or occasionally environmental) impacts.
Objective:Investing with the intention to support positive social or environmental benefits alongside a financial return. |
Common approaches: |
Impact investing
Investing with the intention to generate measurable positive social or environmental benefits.
Thematic investing
Investing based on trends or structural shifts, such as social, industrial and demographic trends.
Active ownership
Entering into a dialogue with companies on ESG issues and exercising both ownership rights and voice to effect change.
Mission-related investing
Aligning investments with organizational values or to further philanthropic goals. Mission-related investments often aim to generate measurable positive social or environmental impacts. Often interchangeable with "impact investing."
Why is ESG growth accelerating?
Why is ESG growth accelerating?
Global sustainability challenges such as flood risk and rising sea levels, privacy and data security, demographic shifts, and regulatory pressures, are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity on a global scale, investors may reevaluate traditional investment approaches.
The world is changing
Global challenges, such as climate risk, increased regulatory pressures, social and demographic shifts and privacy and data security concerns, represent new or increasing risks for investors. The economic pressure the COVID-19 pandemic has placed on some industries has affected companies’ exposure to ESG risks and their ability to manage them. Companies face rising complexities and greater scrutiny if they are not adequately managing their ESG or climate risk.
A new generation of investors
The interest from millennial investors around the world has already helped drive the rapid growth in ESG investment. In a 2018 survey, Bank of America Merrill Lynch said that they could "conservatively estimate" USD 20 trillion of assets growth in U.S.-domiciled ESG funds alone over the next two decades.1
Better data and technology for more meaningful insights
Advanced technology, including artificial intelligence (AI) and alternative data extraction techniques help minimize our reliance on voluntary disclosure from companies. Machine learning and natural language processing help us increase the timeliness and precision of data collection, analysis and validation to deliver dynamic content and financially relevant ESG insights.
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Dive into ESG Investing
Dive into ESG Investing
Deconstructing ESG Ratings Performance
Navigating the Complexities of Labeled bonds
Labeled bonds not only grew as a market in the years since 2014; they became increasingly complex.
The Evolution of ESG Investing
ESG investing is growing exponentially as more investors and issuers utilize ESG and climate data and tools to support their investment decision-making.
Foundations of ESG Investing
Changes in a company’s ESG characteristics may be a useful financial indicator.
ESG Funds in Focus
Quantifying ESG risks and opportunities for mutual funds and ETFs.
ESG Transparency Tools
ESG Transparency Tools card
Explore our ESG & Climate Solutions
Explore our ESG & Climate Solutions
ESG Investing
ESG Investing
ESG Investing is growing exponentially as more investors and issuers utilize ESG and climate data and tools to support their investment decision making.
Climate Solutions
MSCI offers a suite of tools to help institutional investors benchmark, measure and manage portfolio exposure to climate risk, identify low carbon investment opportunities, and support investors seeking to set a net-zero target.
ESG Indexes
MSCI ESG Indexes are designed to represent the performance of the most common ESG investment approaches by including, re-weighting or excluding companies by leveraging ESG criteria.
Climate Lab Enterprise
Climate Lab Enterprise provides institutional investors with the tools and services they need for net-zero alignment.
ESG Investing contact us
If you would like to learn more about our ESG & Climate Solutions:
Contact us
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Why ESG?
This interactive page explores the rapid rise in ESG investing, thedrivers of growth, how you can integrate ESG and climate into yourinvestment processes.
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ESG 101 footnotes
1Bank of America Merrill Lynch, ESG Matters – US. “10 reasons you should care about ESG” https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID19_1119/esg_matters.pdf
