The New York-based CFA Institute has developed and released a new guide that provides an overview of environmental, social and governance (ESG) considerations in the investing process and is meant to combat myths that surround these factors.
“Awareness of ESG issues in investing has grown substantially in the last decade, from energy efficiency to employee relations to bribery and corruption,” says Usman Hayat, content director of Islamic finance and ESG at the CFA Institute, in a statement. “How these issues impact investment management is still not well understood and certain myths are common. This guide provides a clear explanation of ESG risks and opportunities, debunks common myths, and helps investors better understand and evaluate social and environmental issues to make better decisions.”
One of those myths is that investment firms consider ESG issues primarily in order to protect their reputation. However, a global survey of CFA members conducted in May found that the most popular reason for prioritizing ESG considerations is it allows investment professionals to manage risks.
The guide also explains the background and trends around ESG issues as well as the description of six common methods used to apply ESG factors in investment portfolios. These methods include exclusionary screening, which avoids the securities of companies on the basis of not being ESG-friendly, and “best-in-class” selection, in which investment firms look for companies whose ESG performance is better relative to their sector peers.
The report, entitled Environmental Social & Governance Issues in Investments: A Guide for Investment Professionals, has been added to the CFA Institute’s library of ESG resources.