Importance of a non-prescriptive approach to ESG

Thursday 12 September 2019

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Brishni Mukhopadhyay, CFA, Asset Management at J.P. Morgan Asset Management outlines ESG and the importance of standardisation to keep the industry accountable in its ESG action planning and strategies.

The case for Sustainable Investing through consideration of Environmental, Social and Governance (ESG) facets within investment management has never been more robust than it is today. What once began with a few altruistic individuals and funds looking at aspects of impact investing, has now evolved into a widely acknowledged approach and sits on the cusp of going mainstream. Driven by increasing consumer focus around sustainability, ethical governance and fair practice as key components of the product and consumption experience, shareholder activism and regulatory pressures, corporations have had to implement robust mechanisms to address their ESG footprint. The same winds of change have made it incumbent on the investment management industry to look at ways to identify, assess and integrate these factors within an analytical and risk mitigation framework.

Given the consensus for ESG, it becomes important to define what ESG is. While there is general agreement on key qualitative factors that constitute each of the ‘E’, ‘S’ and ‘G’ factors, it is perhaps more challenging to assign relative importance to one over another or ascribe definitive quantitative limits with precision. Dynamic markets, rapidly evolving regulatory landscape, variation in client goals, the lack of uniformity in regional approaches to ESG and lack of standardisation in industry interpretation of the relative importance of key ESG attributes have resulted in a lack of standardization. This variation in themes leads to different approaches and emphasis when integrating into portfolio solutions for clients. Whether it is seeking to avoid harm, mitigating risk or looking at ways to improve the risk-return profile of a solution, ESG investment offers a range of methods to offer client solutions. Some popular styles are as follows:

  • Positive/best-in-class screening based on including sectors/corporates with positive ESG score compared to industry peers.
  • Negative/exclusionary screening based on excluding sectors/corporates with negative ESG score compared to industry peers.
  • Norms-based screening based on including/excluding corporates/government sectors based on standards or norms on human rights, labour standards, environmental standards to name a few.
  • Sustainability themed investing based on investment in specific sustainable themes.
  • Impact investing based on addressing environmental or social concerns specifically through investment solutions.
  • Corporate engagement and shareholder activism based on engagement and proxy voting to affect corporate behaviour.

Despite some overlap among some of the styles, they generally look to address distinct aspects of the ESG spectrum. A further variation arises when one seeks to distinguish between materiality of one factor when compared to another. It is not inconceivable that subtle differences in quantitative scores based on proprietary analysis when input into models could result in a divergence in the result with subtly different gradation across the ESG spectrum. This is also observable when one compares ESG metrics publicly available by data providers. This is not to say that the approach is flawed but to recognise that each approach has its merit and adopts a different perspective. Consequently, it presents the industry with an opportunity to offer bespoke solutions, while adhering to a coherent framework, in the best interests of their clients through a non-prescriptive approach to ESG.

In summary, it is essential to eschew a prescriptive approach that seeks to restrict and espouse flexibility to offer distinct ESG incorporated solutions to address client needs. As this nascent ESG approach matures, it is important to recognise that a non-prescriptive approach allows competition between different ideas and approaches before the industry settles upon a suitable approach under various ESG requirements. Until then, let the battle of ideas flourish!


Interested in learning more about the CFA UK Certificate in ESG Investing? Find out more and register your interest here.

This article was written by Brishni Mukhopadhyay, CFA, Asset Management at J.P. Morgan Asset Management. If you too would like to join the conversation and share your views on the development of ESG investing and its impact on our industry, please contact to enquire about editorial opportunities.


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