The environmental, social and governance factors of a company are relevant because they end up influencing financial performance and this is easier to say than to measure. Unlike financial performance, ESG requires weighing aspects that cannot be measured in money. Although there is specific knowledge for some industries and areas, this does not necessarily permeate naturally to all companies, much less is it easy to understand in some cases.
ESG factors must be identified, measured and classified in order to be reported. Once reported, they can be used by analysts to develop investment strategies where they are taken as a reference to encourage investment in a particular company. They can also help to ‘rank’ companies in a sector or according to some particular criteria, so potential investors can take them as decision elements.
Mainly, there are five strategies to implement ESG factors in an investment portfolio:
1. ESG Assessment
It is a basic analysis of ESG factors that identifies the most relevant characteristics of an asset. It may result in certain assets, companies, industries or geographies being avoided in the investment portfolio based on potential value or risk factors indicated by the ESG elements. This strategy can be implemented independently or in combination with others.
2. ESG design
In the next step, ESG factors are used as decision-making elements to weigh them in the analysis and choose the best assets to invest. It requires more work and information, since it is not a filter, but an alignment element with what the investor is looking for.
3. ESG prioritization
He ESF First is guided by a mandate that puts ESG performance before performance in portfolio design. This can be aligned with elements of portfolio risk, but should not be entirely rational from a performance standpoint.