Incorporating ESG into Socially Responsible Investing

Today’s investors require extensive data to make the right ESG decisions.

Anna Hyrske, 20.08.2013

Portfolio managers are learning to chart the waters to benefit investors and society.

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The world of socially responsible investment is filled with a surfeit of acronyms. There is SRI, SR, RI, ESG, CSR, CR, not to forget UNPRI, CDP, ICGN, IIGCC, FINSIF - just to name a few off the top of my head. No wonder investors are left in the dark, not quite understanding what is required of them, what they ought to do and what they most definitely should not do.

Each investor's investment strategy and ownership policy is different and, therefore, their ESG (environmental, sovial and governance) approaches and tools also differ. The basic premise, however, is sound - integrating ESG principles will diminish risks and enhance returns. There may be other motives for respońsible investing as well, such as, brand management and ethical considerations.

Institutional Investors

Institutional investors may utilize external service and research providers to evaluate ESG criteria within their portfolios. Some investors may take a more thematic approach and set, for example, climate change as a priority when putting together a portfolio. Others have opted for a more standard based valuation where the minimun requirement for companies is the adoption of international norms, such as ILO conventions, Declaration of Human Rights and OECD Guidelines for Multinational Enterprises.

There are other approaches, too, but whatever the approach, investors require massive amounts of information from the companies they invest in or are considereing investing in. Investors are one of the key stakeholder groups for many companies, but they are also one of the most difficult groups to serve because of the differing needs for ESG information. The information can be gleaned from Annual Reports or Sustainability Reports, but increasingly it comes from individual or theme based questionnaires, indices and service providers, including sustainability rating providers.

Portfolio Managers

Portfolio managers are becoming more skilled at evaluating ESG factors as part of everyday portfolio management. ESG issues are also put on the table more often at regular company meetings. UN Principles for Responsible Investment has attracted more than one thousand signatories, and one could conclude that ESG is now being taken seriously by investment professionals, too.

The beauty of all this is that there are always things that can be done, best practices from other investors to follow and stakeholder dialogues to be conducted. The downside is that there is so much to do that no single organization is able to do it all. Integrating ESG principles into investment decision-making is truly never ending story. When embarking on this trip one should forget about achieving perfection and go for continuous, incremental improvement instead.

PROFILE MAGAZINE 2/2013, page 17

Anna Hyrske is Head of Responsible Investments at Ilmarinen Mutual Pension Insurance Company. She has over 10 years of investment experience in integrating ESG issues into investment decisionmaking. Hyrske has studied this topic academically and has recently co-written the first book in Finnish (Vastuullinen sijoittaminen) on responsible investments.
Read about Aalto PRO's Diploma in Responsible business and Environmental Management program.

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