Simply put, ESG Investing is when one utilizes environmental, social and governance (ESG) criterion during the portfolio construction and/or analysis processes. Historically, the term ESG investing came out of the field of socially responsible investing (SRI). Arguably, SRI can be used as an umbrella term for many buzz terms: ESG investing, impact investing, ethical investing, valued based investing, green investing, among others. The important similarity amongst all buzz terms within the field of SRI is that they approach investing through some form of environmental, social, or corporate governance perspective. Even the first commonly dated approach to SRI utilized social criteria within their investment decisions. In 1758, the Religious Society of Friends (Quakers) prohibited the participation in the slave trade- the buying and selling of humans.
The practice of considering environmental, social, and governance (ESG) issues in investing has evolved significantly from its origins in the exclusionary screening of listed equities based on moral values. A variety of methods are now being used by both income-motivated and values-motivated investors in considering ESG issues across asset classes. Best-in-class methods, positive screening, sustainability themed investing, shareholder action and direct investments (normally referred to as impact investing) are a few approaches being applied. Best-in-class or positive screening are investments in sectors, companies or projects selected for positive ESG performance relative to their industry peers. Shareholder action utilizes proxy voting as a way to create change, getting companies to integrate more ESG approaches within their operations. Lastly, impact investing is investing in companies, organizations and funds in the private markets with the direct intention to make measurable social or environmental impact (ie. Sustainable agriculture, financial inclusion).