Introduction 1
About This Book 1
Foolish Assumptions 2
Icons Used in This Book 3
Beyond the Book 3
Where to Go from Here 3
Part 1: Getting to Know ESG 5
Chapter 1: Entering the World of ESG Investing 7
Surveying the Current ESG Landscape 8
Exploring What ESG Is (and Isn’t) 9
Defining the breadth of ESG 10
Comparing SRI, ethical, and impact investing to ESG 14
Determining whether ESG delivers good investment performance 16
Understanding ESG’s Impact on the Environment, Society, and Governance 17
Meeting environmental and global warming targets 17
Providing solutions to social challenges 18
Meeting corporate governance requirements 18
Using International Standards to Determine ESG Objectives 19
Leading the charge: European legislation on ESG 20
Ahead of its time: The United Nations 21
Staying focused: The Sustainability Accounting Standards Board 21
Building a framework: The Global Reporting Initiative 22
Chapter 2: Back to the Future: Understanding the Evolution and Growth of ESG Investing 23
Studying the Evolution of Investing in ESG 24
Investing through the ages: From SRI to ESG 24
Go green: The changing global environment 27
On trend: Changing investor demographics 28
Crunch the numbers: Evolving data and analytics 29
Exploring the “Personality” of an ESG Company 31
Determining material ESG factors 31
Performing a materiality analysis 32
Applying weights to materiality measures 33
Understanding Why ESG Is Important 34
Global sustainability challenges 35
The interest of millennial investors in ESG 35
More systematic, quantitative, objective, and financially relevant approaches 36
Surveying Specific ESG Ratings and Metrics 36
Data quality, ratings bias, and standardization 37
Issues with ESG scoring 38
ESG momentum importance 39
Applying artificial intelligence and data science to ESG analysis 39
Defining an ESG Policy 40
Familiarize yourself with ESG and asset owner–specific legislation 40
Undertake a peer review 41
Review your statement of investment beliefs and core investment principles 41
Specify responsible investment guidelines 41
Outline responsible investment procedures 42
Include engagement and active ownership approaches 42
Spell out reporting requirements 43
Chapter 3: Give Me an ‘E’! Defining the Environmental Sector in ESG 45
Outlining a Company’s Use of Natural Resources 46
CO2 or GHG? Climate change and carbon emissions 46
Clean and green: Energy efficiency 48
A crisis awaits: Conservation of water 49
There is no Planet B: Air and water pollution 50
Live and let live: Biodiversity 51
See the forest for the trees: Deforestation 52
Don’t throw your future away: Waste management 54
Studying the Effects of a Company’s Operations on the Environment 55
Direct operations 55
Supply chains 56
Defining “Green” for a Company 57
Internalizing (or managing) externalities 58
The 3Rs: Reduce, reuse, and recycle 58
Detailing a Company’s Performance as a Steward of the Physical Environment 60
Managing operations to reduce emissions and promote sustainability 61
Collaborating with others to create solutions for environmental issues 61
Chapter 4: Give Me an ‘S’! Investigating the Social Aspects of ESG 63
Identifying Factors in a Company’s Social Performance 65
Customer satisfaction 65
Data protection and privacy 66
Gender and diversity 68
Employee engagement 69
Community relations 70
Human rights 71
Labor standards 72
Evaluating a Company’s Social Performance 73
The results are in: Achievements 74
When in Rome: Differentiating on a national or regional basis 75
Determining Measurements for Social Performance 75
The alignment of social and economic responsibilities 76
Long-term change for people and communities 77
Deciding on Weight Factors 78
Take your pick: Different social issues 78
Think outside the box: Scenario analysis 79
Chapter 5: Give Me a ‘G’! Decoding the Governance Component of ESG 83
The Good Place: Defining What “Good” Corporate Governance Looks Like 84
The benefits of good governance 85
Practices and values 86
Multiple stakeholder orientation 87
Walk the Walk: Evaluating a Company’s Governance Values 88
Board responsibilities 89
Board composition 90
Audit committee structure 90
Bribery and corruption 92
Executive compensation 94
Lobbying 95
Political contributions 96
Whistleblower schemes 97
Lead the Way: Emphasizing How ‘G’ Can Dictate the ‘E’ and ‘S’ Factors 98
Governance as an overarching principle for ESG 98
The role of governments 100
Around the World: Underlining Regional Differences in Governance Activities 101
Emerging markets 102
North America 104
Europe 105
Chapter 6: Highlighting Corporate Greenwashing 107
The Grass Isn’t Always Greener: The Basics of Greenwashing 108
Tracking the growth of greenwashing 108
Specifying the details 109
Using plain language 110
Setting up a system 112
Just When You Thought It Was Safe: Coronawashing 113
Coronawashing on the corporate side 113
Coronawashing on the investor side 114
Part 2: Investing in ESG through Different Instruments 117
Chapter 7: Approaches to ESG Investing 119
Understanding Socially Responsible Investing 120
Looking at reasons for SRI 120
Comparing a best-in-class strategy to an exclusion strategy 121
Weighing the potential return on SRI decisions 122
Evaluating Impact Investing 124
Defining and tracking “impact” 124
Measuring social and environmental outcome targets 126
Calculating impact metrics 127
Focusing on Faith-Based Investing 128
Reviewing religious principles of finance 128
Examining exclusion screening and divesting 129
Advocating for values through proxy voting 130
Chapter 8: Analyzing Equity-Based Instruments 133
Integrating ESG Strategies into Investment Decisions 134
Just the basics: Getting an overview of the process 134
Using active strategies 136
Analyzing the impact of different ESG scores 137
Watch out: Thinking about risks and disclosures 138
Investigating how companies with higher ESG scores outperform 139
Take it easy: Applying passive strategies 140
Reviewing relative returns and performance of ESG stocks 143
Verifying Quantitative Strategies 145
Constructing equity portfolios that integrate ESG factors 146
Adjusting stock index constituent weights 148
Determining which ESG factors matter most in quantitative strategies 148
Identifying Smart Beta Strategies 151
Extending negative stock screening to smart beta strategies 153
Using ESG equity factors and scores to weight portfolio construction 153
Focusing on a Given Theme 154
Sector exposure 154
Thematic exposure 155
Chapter 9: ESG and Fixed Income Instruments 157
Analyzing Fixed Income (Bond) Factors 158
The importance of risk 158
Strategies for adding ESG to fixed income portfolios 159
Bond issuer goals 160
Defraying interest rate costs 161
All together now: ESG integration issues 162
Bond pricing 163
Mix it up: Credit and ESG ratings 164
Emphasizing Bond Issuer Differences 165
For king and country: Sovereign issuance 166
Corporate issuance 168
Room for more: Emerging markets 168
Highlighting Fixed Income Indexes 169
Identifying Specific ESG Exposures 171
For the earth: Green bonds 172
Think big: Social bonds 174
Keep it up: Sustainability and sustainability-linked bonds 175
Chapter 10: Exploring Derivative and Alternative Instruments 177
Achieving Passive Returns Using ESG Indexes 178
The basics of exchange-traded products 179
OTC derivatives 180
Building blocks: Structured products 181
Increasing Focus on ESG in Alternative Assets 182
Sustainable lending 182
ESG in hedge funds 184
Focusing on Illiquid Assets 186
Around the block: Real estate 186
Laying foundations: Infrastructure 187
Hush-hush: Private equity 188
Investing in “Traditional” ESG 189
Pull the plug: The basics of renewable energy investment 190
Light my fire: Solar power 191
There she blows: Wind power 192
Chapter 11: Highlighting Geographical Differences in ESG Investing 195
The Beginning: Europe 196
Highlighting the regulatory developments 198
Enjoying a first mover advantage on ESG investment 201
Continuing inflows for ESG funds 202
The Middle: North America 203
Highlighting political and regulatory roadblocks in the United States 204
Investigating Canada’s approach 206
Driving up demand 207
The End: Developed versus Emerging Markets 208
Seeing that emerging markets are lagging but disclosure is increasing 209
Highlighting political and regulatory developments 211
Determining whether an ESG approach is better suited to developed economies 212
Part 3: Applying ESG Philosophy 215
Chapter 12: Creating Value through ESG for Corporations 217
Crystal Clear: Corporate Disclosure and Transparency 218
Meet the team: ESG engagement 219
Thank you for sharing: Communication from the board 221
Grow the Pie: Generating Enhanced Returns 221
Increasing access to capital 222
Corporate adoption and action 223
Roll Up, Roll Up: Attracting More Customers 224
Tracking sustainability practices 225
Measuring intangible value drivers 226
Identifying material opportunities 227
Pare It Back: Reducing Costs 228
Green financing 228
How low can you go? Lower interest rates and higher credit ratings 229
The Bottom Line: Increasing Productivity and Attracting Talent 230
Chapter 13: Devising an ESG Policy 233
Here’s a Great Idea: Creating a Plan 234
Promoting ESG among key stakeholders 235
Creating an internal governance structure 235
Don’t Reinvent the Wheel: Undertaking a Peer Review 236
Devising ESG investment strategies 236
Identifying, assessing, and selecting ESG investments 238
Go Over It: Reviewing Your Core Investment Principles 238
Familiarizing Yourself with ESG-Specific Regulations 240
Comparing Europe and the United States 240
Taking into account sustainability-related risks 241
Doing effective due diligence on ESG greenwashing 242
Surveying Reporting Requirements 243
Essential characteristics of ESG data 244
Material factors for investors 244
Examining ESG Engagement 245
Conducting constructive dialogue on managing ESG risks 245
Seizing business opportunities associated with sustainability challenges 246
Chapter 14: Defining and Measuring ESG Performance and Reporting 249
Defining Criteria and Metrics 250
Follow the rules: Looking at regulators’ work 251
The devil is in the details: Analyzing corporate sustainability reports 252
Walk the walk: Committing to corporate social responsibility practices 253
Show me the money: Identifying investment performance 254
Calculating Relative ESG Performance 255
Against the broader market 257
Against specific benchmarks 258
Getting a Handle on Ratings and Rankings 259
Securities 260
Portfolios 261
Not the sharpest tool: Smart beta 262
Developing Frameworks for Reporting 262
In your view: ESG objectives 263
Play by the rules: ESG compliance 265
Meet the players: Comparing different frameworks 265
Chapter 15: Elaborating the ESG Endgame 269
Highlighting the Evolution of ESG from Niche to Mainstream Strategy 269
Achieving competitive financial returns with positive ESG impact 270
Emphasizing the need for common terminology 271
Watching the Growing Use and Acceptance of ESG Standards 272
Digging into disclosures 272
Providing data consistency 274
Developing national and international financial reporting standards 275
Looking at the Increasing Impact of ESG Ratings and Rankings 278
Qualitative decisions 279
Quantitative decisions 280
Improving Education 281
What do investors believe is important? 282
What should a company know about its ESG rating? 283
Part 4: The Part of Tens 285
Chapter 16: Ten Frequently Asked Questions for an ESG Approach 287
What Is ESG Investing? 287
Which Sustainability Goals Should Be Followed? 288
What Are the Characteristics of an ESG Company? 289
How Is an ESG Company Rated? 290
What Investing Principles Should Be Adopted for ESG? 291
What Is Stewardship? 292
How Is an ESG Approach for Asset Owners Implemented? 293
How Are Benchmarks and Performance Measurement Incorporated in ESG? 293
What’s the Latest on Disclosures and Reporting? 294
What’s the Future of ESG Investing? 295
Chapter 17: Ten Issues Surrounding ESG Portfolio Construction 297
Reasons for Varying ESG Scores between Rating Agencies 297
Criteria Used in Creating a Combined ESG Score 298
Trends Driving ESG Materiality 299
Quantitative Approaches to ESG Analysis 300
Qualitative Analysis: Verifying and Supplementing Quantitative Analysis 301
ESG Regulations 302
Risk and Reward 303
Derivative and Alternative Instruments 304
Stranded Assets 305
Sustainable Investing 306
Chapter 18: Ten Factors Influencing the Growth of ESG Investing 307
Climate Change: The Route to Net Zero 308
Environmental and Social Issues Coming to the Fore 308
Stewardship as a Driver for Change 309
ESG Disclosures 310
Accounting 311
Regulation and International Standards 312
Impact Investing: Actively Do Good versus “Do No Harm” 313
Data and Technology 314
Consolidation of the ESG Ratings Companies 315
Political Impacts: Geopolitics and Public Pressure 316
Appendix: Great Resources For ESG Investing 319
Index 327
