Responsible

Investment
Responsible Investment
• Responsible investment involves considering environmental,
social and governance (ESG) issues when making investment
decisions and influencing companies or assets (known as
active ownership or stewardship). It complements traditional
financial analysis and portfolio construction techniques.

• Responsible investors can have different objectives. Some

focus exclusively on financial returns and consider ESG
issues that could impact these. Others aim to generate
financial returns and to achieve positive outcomes for people
and the planet, while avoiding negative ones.
Milestones in the evolution of responsible investment
Why to invest responsibly
• Financial materiality
• Client demand
• Policy and regulation
• Fiduciary duties
• Sustainability outcomes
How to invest responsibly
ESG incorporation

ESG incorporation means assessing, reviewing, and

considering ESG issues in existing investment practices, by
combining any of these approaches: integration, screening,
and thematic investing.
Screening
Negative Screening

Negative screening is the process of excluding companies, sectors, or industries

from an investment portfolio based on specific ethical, environmental, or social
criteria. It is the oldest and most widely practiced responsible investing
approach.
• How It Works:
• Investors apply filters to exclude companies involved in controversial activities
like tobacco production, alcohol, gambling, fossil fuels, or weapons
manufacturing.
• The exclusion criteria are often based on religious values, ethical guidelines, or
international standards like the UN Global Compact principles.
Positive Screening
Positive screening involves actively selecting companies for investment
based on superior ESG performance or alignment with specific
sustainability goals. This approach rewards companies that lead in
responsible business practices.
• How It Works:
• Investors assess companies based on ESG metrics, such as carbon
footprint reduction, gender diversity, or community development.
• Companies that meet or exceed these standards are included in the
investment portfolio.
Best-in-Class Screening
Best-in-class screening is a subset of positive screening that focuses on
selecting the top performers within a specific sector or industry based
on ESG criteria.
• How It Works:
• Rather than excluding entire industries, this approach identifies
leaders in ESG performance within traditionally high-impact sectors
(e.g., energy or mining).
• For instance, a best-in-class investor might choose a renewable
energy-focused oil company over traditional fossil fuel firms.
• Stewardship
• Stewardship means using influence to maximise overall long-term
value – including of common economic, social, and environmental
assets – that client and beneficiary returns and interests depend on.
• Engagement is one of the ways investors can fulfil their stewardship
obligations. It involves interactions and dialogue between an
investor, or their service provider, and a current or potential
investee or other stakeholder to improve practice on an ESG factor,
make progress on sustainability outcomes, or improve public
disclosure. In private markets, engagement also refers to investors’
direct control over and dialogue with management teams or boards.
• Stewardship activities can be directed at existing and potential
investees (e.g., companies, issuers, assets) and other stakeholders,
such as policy makers and standard setters.
Principles of Responsible Investing
•Principle 1: We will incorporate ESG issues into •Principle 1: ESG Integration in
investment analysis and decision-making processes. Analysis and Decision-Making
•Principle 2: We will be active owners and incorporate
•Principle 2: Active Ownership
ESG issues into our ownership policies and practices.
•Principle 3: We will seek appropriate disclosure on •Principle 3: Demand for ESG
ESG issues by the entities in which we invest. Disclosure
•Principle 4: We will promote acceptance and •Principle 4: Promote Industry-Wide
implementation of the Principles within the investment Implementation
industry. •Principle 5: Collaboration to
•Principle 5: We will work together to enhance our Enhance Effectiveness
effectiveness in implementing the Principles.
•Principle 6: We will each report on our activities and •Principle 6: Reporting on Progress
progress towards implementing the Principles.
Impact Investing
• Impact investing is a form of investment that aims to generate
measurable positive social and environmental impact alongside
financial returns.
Key Characteristics of Impact
Investing
• Dual Objectives
• Intentionality
• Measurability
• Diverse Asset Classes
• Alignment with Global Goals
Examples of Impact Investing
• Renewable Energy Projects
• Affordable Housing
• Healthcare Access
• Education Technology
• Microfinance
Key Players in Impact Investing
• Institutional Investors
• Development Finance Institutions (DFIs)
• Impact-Focused Venture Capitalists
• Retail Investors
• Corporate Initiatives
Benefits and Challenges
• Class Task
 Innovations in Impact Investing

Blended Finance Models

•Structure: Combines public, philanthropic, and private capital to de-risk
investments and attract larger pools of funds.
•Impact: Expands capital access for high-risk projects in underserved regions.

Outcome-Based Financing
•Social Impact Bonds (SIBs) and Green Bonds: Investors receive returns only
if the funded projects achieve predefined social or environmental outcomes.
•Impact: Aligns investor returns with measurable impact.
Thematic Funds
•Focus Areas: Funds dedicated to specific themes like climate change,
gender equality, or affordable healthcare.
•Impact: Directs capital toward achieving global sustainability targets.

ESG Data Analytics and Scoring

•Innovation: Advanced analytics powered by AI and machine learning
evaluate ESG performance, aiding better decision-making.
•Impact: Enhances transparency and investor confidence.
Crowdfunding Platforms
•Innovation: Different platforms allows retail investors to fund social
enterprises or renewable energy projects.
•Impact: Broadens access to impact investing opportunities.

Blockchain for Transparency

•Innovation: Blockchain enables traceability of funds, ensuring
investments are used for intended purposes.
•Impact: Builds trust and reduces fraud.
Innovations in Market Infrastructure

Green and Social Stock Exchanges

•Innovation: Platforms which list securities from socially or environmentally
driven companies.
•Impact: Provides liquidity and visibility for impact-driven organizations.

Tokenization of Assets
•Innovation: Tokenizing impact investments like renewable energy projects or
social housing allows fractional ownership and liquidity.
•Impact: Enhances accessibility and scalability
•Impact Measurement Standards
•Innovation: Frameworks standardize impact measurement.
•Impact: Facilitates comparability and accountability across
investments.

•Digital Platforms for Deal Sourcing

•Innovation: Platforms connect investors with vetted impact
opportunities globally.
•Impact: Reduces transaction costs and accelerates deal flow
•AI-Powered Due Diligence
•Innovation: Artificial intelligence and big data streamline due
diligence by analyzing vast amounts of information quickly.
•Impact: Improves efficiency and reduces risks in the investment
process.

•Sustainability-Linked Instruments
•Innovation: Instruments like sustainability-linked loans or bonds
tie financial terms to ESG performance metrics.
•Impact: Encourages companies to meet sustainability
milestones.
Future Outlook
• Technological Integration: Increased adoption of blockchain, AI, and
IoT will enhance transparency, efficiency, and scalability.
• Regulatory Advancements: Global and regional policies will likely
support market infrastructures, encouraging broader participation.
• Global Collaboration: Partnerships between governments, private
sectors, and multilateral organizations will drive systemic changes in
impact investing.
Timeline and history of ESG investing
• In 1971, two United Methodist ministers opposed to the Vietnam
War created the Pax World Fund, the first publicly available
mutual fund in the U.S. that factored social and environmental
criteria into investment decisions. Meanwhile, pension funds
with the interests of worker-investors in mind began targeting
investments in areas geared to improved healthcare and
affordable housing. But decades passed until actions like these
were formalized into specific rules and practices that eventually
manifested into the environmental, social and governance
framework.
• 1990: Domini 400 Social Index
• Amy Domini, Peter Kinder and Steve Lydenberg, who jointly managed
KLD Research and Analytics, created the Domini 400 Social Index, which
focused on companies prioritizing social and environmental responsibility.
During this time, including social and environmental issues among
business priorities was considered a bad gamble for investors.
• The following year, the Domini Social Impact Equity Fund was launched
to test the waters on such investments. The fund attracted $1.3 billion by
2001 and showed returns of 15.08% compared to 15.25% for the S&P
500, demonstrating that investing in socially responsible issues can
deliver strong financial returns.
• The Domini 400 is now called the MSCI KLD 400 Social Index. The
weighted index, which consists of 400 U.S. securities, "provides exposure
to companies with outstanding ESG ratings and excludes companies
whose products have negative social or environmental impacts."
• 1992: United Nations Framework Convention on Climate
Change
• A group of 154 nations signed a treaty to mitigate "dangerous
human interference with the climate system" at the Earth
Summit in Rio de Janeiro. The treaty called for research and
ongoing meetings and planted the seeds for future policy
agreements. It also launched an annual meeting of participants
called the Conference of the Parties (COP) to hash out details
and revise goals. This action helped galvanize international
efforts to mitigate temperature increases caused by human
greenhouse gas emissions with plans to cap and reduce them
over time.
• 1995: First sustainable investment inventory in the U.S.
• The Washington, D.C.-based Social Investment Forum Foundation,
now known as the U.S. SIF Foundation, took the first inventory of
the total size of sustainable investments, revealing a total of $639
billion in assets managed in the U.S. By 2020, the Global
Sustainable Investment Alliance estimated $35.3 trillion in
sustainable assets worldwide.
• Meanwhile, the U.S. SIF's December 2022 report listed $8.4 trillion
in ESG and sustainable investments in the U.S. That was down
from $17.1 trillion in 2020 due to a decision to remove investors
that don't provide specific information on what ESG criteria they
follow. But U.S. SIF said the $8.4 trillion still amounted to 12.6% of
all the professionally managed investment assets in the U.S.
• 1997: Kyoto Protocol
• The Kyoto Protocol was adopted in 1997 and entered into force in
2005. An agreement to specific greenhouse gas reduction targets
was eventually ratified by 192 countries, 36 of which signed up for
the first commitment period. All 36 countries met their obligations,
but nine of them had to fund climate reduction programs in other
countries because they went over their targets.
• The two largest emitters, China and the U.S., were absent. China
set no binding targets, while the U.S. never ratified the treaty.
Canada initially participated but withdrew in 2012 after realizing it
would be obligated to pay $14 billion in fines for missing targets.
• 1997: Global Reporting Initiative
• The Global Reporting Initiative (GRI) was launched to address
disclosures by companies related to environmental concerns.
The group later expanded its mandate to also cover reporting
on social and governance issues. In 2016, it shifted from
providing guidelines to releasing the first global standards for
sustainability reporting. As of 2022, 78% of the world's largest
250 companies used the GRI Standards, according to a KPMG
survey.
• 2000: United Nations Global Compact
• The U.N.'s Global Compact established a set of 10 principles for
organizations to adopt across diverse areas, including human rights,
labor practices, the environment and anti-corruption efforts. Presented as
a forum rather than regulations, the Global Compact's goals are
deliberately vague and intended to spark discussions and negotiations
through dialogue-specific projects.
• However, participating companies file an annual report on their
adherence to the principles, and the Global Compact replaced the
report's original narrative format with a standardized questionnaire in
2023. Currently, it says more than 20,000 companies and 3,800 other
organizations submit progress reports.
• 2000: Carbon Disclosure Project
• After previously starting two businesses, Paul Dickinson founded the Carbon
Disclosure Project, now known simply as CDP, to organize and empower large
investors to ask companies to report on their climate performance and ways to
mitigate related risks. In 2002, 35 investors requested climate disclosures from
the 500 largest businesses to help normalize the disclosure process.
• By 2021, companies with 64% of market capitalization responded with
disclosures. CDP also expanded its reporting system to include water security
and deforestation issues -- initially through separate questionnaires, which
were combined into a single one in 2024. In 2023, CDP represented investors
with more than $136 trillion in assets, and more than 23,000 companies
worldwide used its system.
• 2004: First "Who Cares Wins" report published with the
term ESG
• At the invitation of the U.N., a group of banks and other
investment firms summarized the critical issues in a report titled
"Who Cares Wins," which popularized the term ESG. The report
provided several recommendations for integrating ESG issues
in analysis, asset management and securities brokerages. The
group proposed that greater inclusion of ESG factors in
investment decisions will contribute to more stable and
predictable markets. Four more reports were published from
2005 to 2008.
• 2005: Freshfields report
• With backing from the U.N., the London-based law firm Freshfields Bruckhaus
Deringer published "A legal framework for impact: Sustainability impact in
investor decision-making." The report suggested that financial trustees should
include environmental and social considerations in their analysis of companies.
Over the years, this proposal has been refined into investing for sustainability
impact (IFSI).
• 2006: Principles for Responsible Investment
• At the invitation of the U.N., a group of 70 investment and environmental
experts published six principles advocating institutional investors should
incorporate ESG considerations into their decisions. The principles call for
investors to include ESG issues, become active owners, seek appropriate
disclosures, promote acceptance of ESG analysis, enhance effectiveness in
addressing ESG issues, and report on activities and progress.
• 2007: Climate Disclosure Standards Board
• Many of the largest organizations working on climate issues came
together to establish the Climate Disclosure Standards Board
(CDSB). The new group created a reporting framework, first
released in 2010, that focused on the risks and opportunities
posed by climate change on an organization's strategies, financial
performance and condition. It later added considerations for
disclosures related to water usage, deforestation, biodiversity loss
and other environmental issues, as well as the social factors of
ESG.
• The CDSB Framework enabled companies to incorporate ESG
reporting into mainstream reports, including their annual reports
and 10-K filings. At its peak, nearly 375 companies in 32 countries
used the framework, according to the CDSB.
• 2011: Sustainability Accounting Standards Board
• Management and sustainable development consultant Jean Rogers
launched the Sustainability Accounting Standards Board (SASB) to
create standards that reflect the impact of ESG factors on the bottom
line of companies in a specific industry. Beverage companies, for
example, would have to account for water security, while sustainable
energy companies would need to account for the environmental
impact of mining activities.
• The SASB Standards aimed to provide the same consistency in
reporting on the risks and opportunities of meeting sustainability
goals that traditional accounting metrics bring to financial investment
decisions. SASB went on to develop standards for 77 industries
across 11 sectors.
• 2015: U.N. Sustainable Development Goals
• The U.N. General Assembly formulated 17 Sustainable Development Goals
(SDGs). A few years later, the SDGs were further clarified with 169 specific
targets and 232 unique indicators of progress. They cover many issues, including
poverty, food security, health, equality, water, clean energy, work, infrastructure,
sustainability, climate, oceans, ecosystems, justice and partnership.
• 2015: Task Force on Climate-related Financial Disclosures
• The Financial Stability Board, an industry consortium that makes
recommendations on various risks and regulatory actions, launched the Task
Force on Climate-related Financial Disclosures. Two years later, the new group,
commonly known as the TCFD, published 11 recommendations for companies
on reporting information about financial risks posed by climate change. The goal
was to help banks, insurers and investors assess the potential impact of climate
risks on a company's bottom line. Eventually, more than 4,000 companies
declared support for the TCFD recommendations.
• 2016: Workforce Disclosure Initiative
• ShareAction, a charity that supports responsible investment,
launched the Workforce Disclosure Initiative. The WDI program,
which was transferred to the Thomson Reuters Foundation in
2024, aims to increase the value and quality of data that
companies report on workforce health, safety and risk
management metrics. More than 50 institutional investors with a
total of $7.5 trillion in assets under management currently
support the program, and about 170 large employers respond to
the WDI's annual survey.
• 2017: The Compact for Responsive and Responsible Leadership
• More than 140 CEOs signed The Compact for Responsive and Responsible
Leadership at the World Economic Forum (WEF) meeting in Davos, Switzerland.
The CEOs made a commitment to collaborate on the U.N.'s SDGs to benefit both
the companies they run and the world. One of the compact's essential points:
"Society is best served by corporations that have aligned their goals to serve the
long-term goals of society."
• 2017: State Street Global Advisors and board diversity issues
• Asset management firm State Street Global Advisors, in conjunction with the
installation of its "Fearless Girl" statue on Wall Street, told 600 companies in the
U.S., U.K. and Australia that it would vote against the chairs of boards that have
no female directors or candidates. In a matter of months, 42 companies
committed to increasing diversity, and seven of them added women board
members. State Street Global Advisors later voted against 400 companies that
failed to initiate diversity efforts.
• 2019: Davos Manifesto 2020
• The WEF published the Davos Manifesto 2020 as a set of
ethical principles to guide companies through the Fourth
Industrial Revolution. The document expressed the need to
serve employees, customers, suppliers and other stakeholders,
as well as local communities and society as a whole. It
emphasized that companies should treat people with dignity
and respect, integrate human rights into the supply chain, pay
their fair share of taxes and achieve ESG objectives.
• 2020: COVID-19 pandemic and other events
• The COVID-19 pandemic forced millions of employees to work from home and
caused widespread supply chain disruptions, showing how an unforeseen
danger can upend the world economy and the well-being of individuals. Many
businesses struggled to keep pace with the new operating realities driven by
the pandemic.
• A 2020 J.P. Morgan survey of institutional investors found that 71% of the
respondents believed an event like the pandemic would "increase awareness
and actions globally to tackle high-impact/high-probability risks such as those
related to climate change and biodiversity losses."
• Meantime, environmental disasters, including extreme heat, forest fires, floods
and hurridcanes, continued to become more commonplace events. Also, the
mistreatment and subsequent death of George Floyd at the hands of
Minneapolis police, later resulting in convictions for second-degree murder and
other charges, stoked increased concerns about police brutality and racism.
• 2020: Standardized stakeholder capitalism metrics
• The WEF and Big Four accounting firms released a whitepaper standardizing a set
of metrics for companies reporting on their ESG progress. The metrics helped align
reporting on ESG indicators with progress toward the SDGs. Since the release,
more than 150 companies have incorporated the 21 core and 34 expanded metrics
into their reports.
• 2021: E.U.'s Sustainable Finance Disclosure Regulation
• The European Union's Sustainable Finance Disclosure Regulation imposed
requirements on describing funds with specific sustainable investment
objectives that promote environmental or social characteristics and those that are
non-sustainable. The rules introduced Principal Adverse Impact, which
characterizes the negative impacts of investments on sustainability goals. By 2023,
funds that promote sustainability must report on protecting water resources,
transitioning to a circular economy, controlling pollution and restoring biodiversity.
• 2022: Tesla ejected from S&P 500 ESG Index
• About a month after Tesla CEO Elon Musk began negotiating to buy Twitter,
the maker of electric cars was cut from the S&P 500 ESG Index due to a
"rebalance" and its "decline in criteria level scores" for lack of "low carbon
energy and codes of business conduct," wrote Margaret Dorn, senior
director and head of ESG indices in North America at S&P Dow Jones
Indices (DJI). While the ESG score given to Tesla by S&P DJI "has remained
fairly stable year-over-year, it was pushed further down the ranks relative to
its global industry group peers," Dorn added in a May 2022 blog post.
• Other reasons she cited for the company's removal from the index were
claims of racial discrimination and poor working conditions at one factory, as
well as Tesla's handling of a National Highway Traffic Safety Administration
investigation into 17 injuries and one death linked to crashes involving the
company's Autopilot feature .
• 2022: Consolidation of sustainability standards
• Previously, the International Financial Reporting Standards (IFRS) Foundation
maintained accounting standards for most countries, except the U.S. Now it
initiated plans to create a global set of unified standards for sustainability
disclosures. The Value Reporting Foundation, which took over management of
the SASB Standards in 2021, and the Climate Disclosure Standards Board
were both consolidated into the IFRS Foundation. It then created the
International Sustainability Standards Board (ISSB) to develop the new
standards while also overseeing the SASB ones.
• Separately, the U.S. Securities and Exchange Commission (SEC) proposed
new rules requiring publicly traded companies and businesses filing for stock
offerings "to provide certain climate-related information in their registration
statements and annual reports."
• 2023: EU's Corporate Sustainability Reporting Directive
• A new European Union directive went into force, specifying that an estimated 50,000
EU companies and non-EU businesses operating in the region make annual disclosures
on their business risks and opportunities related to social and environmental issues.
The Corporate Sustainability Reporting Directive also requires affected companies to
report on the impact their operations have on people and the environment. These
reports should include information on human rights, anti-corruption, diversity and
other environmental and social matters. The CSRD's reporting requirements take effect
in stages from 2025 to 2029.
• 2023: ESG investing becomes a political issue in the U.S.
• The U.S. Congress adopted a joint resolution to rescind a final rule issued by the
Department of Labor in 2022 that allows retirement fund managers to
consider ESG metrics in investment decisions. President Biden vetoed the measure,
leaving the rule in effect. An ideological battle is unfolding between states that have
embraced ESG-focused investing and states seeking to exclude it. Investors might
gamble on better returns from ESG investments that take advantage of Inflation
Reduction Act climate-related incentives.
• 2023: IFRS Sustainability Disclosure Standards
• The ISSB released two reporting standards: one on sustainability-related
financial information, and the other covering information about climate-
related risks and opportunities. The IFRS Sustainability Disclosure Standards
build on the SASB ones and also incorporate elements of other reporting
guidelines and frameworks. For example, the TCFD recommendations are
included. As a result, the TCFD handed off monitoring of their use to the
ISSB and disbanded. Also, the CDSB Framework's technical guidance was
used as "part of the evidence base" for the climate disclosure standard,
according to the ISSB.
• Separately, the Taskforce on Nature-related Financial Disclosures (TNFD) --
a group modeled on the TCFD -- published a set of 14 recommendations on
disclosing financial information connected to nature and biodiversity issues.
The ISSB is now looking into how it can build upon the TNFD
recommendations as part of its standards.
• 2024: SEC climate risk disclosure rules finalized but stayed
• The SEC finalized the rules on climate risk disclosures for publicly traded
companies that it first proposed in 2022. The new rules would require
companies to disclose climate-related risks that have a material impact on their
business strategies or financial performance. Information on actions to mitigate
or adapt to the risks would also need to be reported. But multiple legal
challenges were filed against the rules, which prompted the SEC to voluntarily
put their implementation on hold while the lawsuits proceed.
• 2024: EU's Corporate Sustainability Due Diligence Directive
• Another sustainability-related measure went into force in the EU: the Corporate
Sustainability Due Diligence Directive (CSDDD). Starting in 2027, it will require
qualifying companies to identify and act on adverse human rights and
environmental impacts. The CSDDD applies to both internal operations and
supply chains. It also requires annual reporting on due diligence activities,
which companies subject to the CSRD are expected to include in those reports.