What is ESG Investing?

ESG investing refers to the consideration of financial and non-financial factors in investment decision- making. Non-financial factors carry more weight in ESG investing than in traditional investment-thinking. These factors are:

  • environmental impact (eg. emissions or resource consumption)
  • social impact (eg. employee training or diversity policies)
  • governance attributes (eg. board structure or shareholder rights of a corporation)

Why should you care?

Trends in the investment landscape indicate that trillions of dollars could be allocated to ESG-oriented equity investments, and thus to stocks that are attractive on ESG metrics.

Types of ESG Investing

There are usually three objectives when investors consider an ESG investing strategy: Integration, Values and Impact. To achieve these objectives, institutional investors may pursue different approaches, such as ESG integration, exclusionary or negative screening, or thematic investing.

Another branch of investing is Thematic investing, which delves into areas of investment that impact the global economy/investment landscape and are often environmental or social in nature.

Best Practice

Institutional investors recommend using ESG factors in conjunction with fundamental indicators of success, like valuation and growth. A wealth of research show that combining ESG with fundamental factors would outperform strategies purely based on fundamental factors with less risk.

Issues with ESG Investing

ESG metrics have issues. For example, company-disclosed attributes may have a positive bias, so obtaining less biased sources is advisable. Additionally, a sector-specific framework is necessary. Environmental Innovation was a strong signal of return in Materials and Energy, but generated no alpha in Consumer sectors. Ethics-related governance was among the most alpha-generative factors within Financials and Health Care, but not within Discretionary.

ESG Investing and Alaya Consulting

In addition to promoting best practices regarding data integrity in our ESG reports, we have been advising our clients to improve their ESG ratings and ESG scores annually.  See our case study on how to improve MSCI ESG rating over a few reporting cycles.

Our Survey of ESG Reports in Hong Kong is one of the longest-running ESG studies, offering professional data users such as institutional investors a better picture of the ESG landscape in Hong Kong.

Fill out the contact form to get a copy of our Survey of ESG Reports in Hong Kong (2016/ 2017/ 2018)