What Other Factors Should Go Alongside ESG Integrations?

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ESG Integrations

In short, ESG integration means including ESG considerations in your investment process. However, ESG integration is broad, as different people hold different definitions. Also, the fact that other people have varying moral values makes this definition even wider. Popular ESG integration is defined as the systematic and explicit inclusion of ESG considerations in investment decisions and analysis.

However, the United States (SEC) securities and exchange commission do not define (ESG) environmental, social, and governance integration. But, it views it as an investment strategy that adopts ESG and other non-ESG factors when making investment choices.

Lately, the commission published a recommendation to enhance investments’ disclosure concerning ESG practices. Other factors in the SEC’s ESG integration category go alongside ESG integrations. This article discusses some of those factors.

ESG Issues

There is also a need for more understanding regarding ESG issues, what is considered poor or good in terms of ESG performance, or the criteria used to assess the issuers. For instance, one may consider auto electrification as a plus to ESG performance; others may also think it requires a lot of platinum, leading to more mines and the destruction of the environment. In such an instance, one investor will give auto electrification a high ESG performance while the other will give it a low ESG performance.

The Materiality of ESG Investments

ESG professionals, portfolios, companies, portfolio managers, and other stakeholders have different perceptions of materiality. Some portfolio managers highlight that the issue of materiality is one of the investment considerations that most investors need to question.

However, it is essential to find out which ESG issues are material and to whom. Also, according to SEC’s ESG integration category, the reality of the materiality of an ESG issue depends on the eyes of the beholder. The meaning of materiality also depends on the perspectives. It is also true that all analysts and fund managers do not apply equal weighting on metrics when doing their fundamental analysis.

Evidence of Investment’s Benefits

Even though considerable evidence-based research shows that ESG-integrated investments are more profitable than non-ESG investments, many people still think ESG integration is sacrificing performance. However, ESG integration guarantees the long-term survival of businesses.

Also, with proposed changes in SEC’s ESG integration category, only investments that genuinely adhere to ESG issues will remain in the market. Therefore, ESG integration can be seen as one of the critical ways to guarantee investment sustainability.

ESG Integration Practices.

Of course, ESG data or ESG integration methods will only work best for some. Therefore, ESG integration is a complicated approach to generalize; it can be considered a mixture of science and art to some extent. However, the investors must decide what is material to them and what resources are available to implement each ESG practice.

Summary

There are several other factors that investors need to consider alongside ESG integrations. Some of these factors include the ESG issues, the materiality of the ESG investment, and the ESG integration practices. It is also essential to find evidence of the ESG investment’s benefits.