Responsible Investment is a young industry that lacks widely-acknowledged and precise norms, guidelines and definitions. So far, there is an understanding that Responsible investment is a generic term that refers to a wide range of approaches that integrate ecological, social and governance (ESG) criteria in the investment process. Beyond that, Responsible Investment has a variety of forms.
Two main approaches of Responsible investment can be identified:
This approach refers to the integration of ESG criteria in the investment process. The investor understands ESG as part of his/her fiduciary duty or risk management: ESG aspects have a material impact on the economic value of portfolio holdings. These aspects have to be integrated into the financial analysis of all assets under management in order to optimize the risk-return profile of holdings and portfolios. A specific ethical motivation is possible, but not essential. In the last years, a growing number of asset managers and owners have adopted different types and scopes of these practices. Details about these practices can be found in own or third-party investment (for instance PRI statement) reports.
This approach encompasses all financial products that have a specific socially responsible (SRI) investment strategy. The investor understands ESG criteria as a tool to ensure that the investments he/she makes reflect his/her moral values. Consequently, he/she wants to align investment with ethics, social or environmental purpose in order to improve the sustainable impact of investment decisions. Therefore, issuers with low ESG performance or issuers that are active in controversial sectors and/or activities are considered as problematic investments. Specific SRI products are designed for investors for whom ethical considerations play a major role in their investment strategy (for instance church banks, foundations, etc.).