Investors’ Standpoint: Developing Climate Finance-Oriented Investment Strategies

This chapter sets out the different types of approaches used by major international organizations: Eurosif, GSIA, PRI, and EFAMA. Portfolio management now includes environmental, social, and governance (ESG) data alongside traditional financial information. This shift is largely due to technological advances and the increasing complexity of achieving market-beating returns. ESG investing emphasizes various non-financial elements of stock performance. It collects and analyzes information about a company’s environmental practices, social responsibility, and governance standards. Many fund managers use ESG information mainly to identify and manage potential risks, known as Red Flagging, or negative screening, which involves monitoring and possibly excluding controversial stocks. Positive screening focuses on investing in companies that excel in ESG factors within their industry. Norms-based screening, also known as minimum-standards screening, is a form of negative screening that excludes investments or reduces their portfolio weight if they do not meet established regulations or standards. ESG integration is another approach that involves positive screening. The goal is to enhance financial performance by systematically incorporating ESG issues into investment processes. Sustainability-themed investing focuses on areas related to sustainable development. Thematic funds target specific ESG issues, such as clean energy or sustainable agriculture. Impact investing involves making investments aimed at generating both a financial return and a social or environmental impact. ESG smart beta, a growing area in asset allocation, blends smart beta strategies with ESG factors. Smart beta involves passive investment that employs rules-based methodologies to assign weights based on systematic factors rather than market capitalization. This approach aims to outperform traditional benchmarks while capturing ESG attributes in investment portfolios. Lastly, corporate engagement and stock activism are strategies where shareholders actively influence corporate behavior by communicating with management, voting on shareholder proposals, and participating in direct dialogues about ESG issues.