Methods and steps of ESG investment

ESG investment, as a unique investment strategy, inherits the commonalities of traditional investment and demonstrates its unique differences in implementation steps and methods. Although we have discussed the principles, common methods, and specific execution processes that ESG investment should follow multiple times in previous articles, this article aims to comprehensively outline this topic and provide readers with a clear framework for implementing ESG investment activities.

The core principles of ESG investment

ESG, this abstract investment concept, needs to be combined with specific investment principles in order to effectively guide the practice of ESG investment activities. Among them, the most recognized by the international community is undoubtedly the United Nations Principles for Responsible Investment (PRI), jointly formulated by top institutional investors around the world and promoted by former UN Secretary General Kofi Annan in 2005. This principle was officially released on the New York Stock Exchange in 2006 and gave birth to the United Nations Principles for Responsible Investment (UNPRI), which aims to integrate social responsibility investment issues at the international level, promote, implement, and deepen ESG investment concepts, and promote the widespread application of ESG indicators in the investment industry. At present, more than 120 Chinese financial institutions have joined the ranks of PRI signatories, covering multiple fields such as insurance, securities, and funds.

According to the guidance provided by PRI in the United Nations Principles for Responsible Investment, the implementation of ESG investment activities mainly revolves around the following six core principles:

1. Integration of ESG factorsFully incorporate ESG factors into investment analysis and decision-making. This means that investors need to fully consider ESG related risks and opportunities as important basis for decision-making when formulating ESG investment strategies and making investment decisions. By integrating ESG factors, investors can more comprehensively evaluate the ESG performance and long-term sustainability returns of their investment targets.

2. Actively fulfilling shareholder responsibilitiesAs shareholders, investors should actively participate in the decision-making process of investment targets, exercise voting rights, attend shareholder meetings, and incorporate ESG factors into ownership policies and practices. This requires investors to assume corresponding responsibilities while exercising shareholder rights, ensuring that the decisions and behaviors of investment targets comply with the requirements and concepts of ESG investment, and promoting the achievement of sustainable development goals.

3. Strengthening information disclosureInvestors should require investment targets to provide accurate and detailed ESG information disclosure. The quantity and quality of information should be effectively controlled to ensure the accuracy and effectiveness of ESG related investment decisions.

4. Promotion of Industry CooperationThrough industry cooperation, promote the widespread adoption and implementation of responsible investment principles in the investment community. When ESG investment becomes an industry consensus, excellent practices will be shared, and investors can engage in joint actions or collaborative investment projects, generating market guidance and promoting ESG factors to occupy a more important position in investment activities.

5. Strengthening communication and cooperationAdequate communication and cooperation between investors and investment targets are key to the success of ESG investment activities. Investors can provide suggestions and requirements to encourage investment targets to improve and optimize their ESG performance, and adopt development measures that are in line with ESG investment concepts.

6. Regular reporting and evaluationInvestors should regularly request investment targets to report on the implementation and progress of responsible investment principles, and publicly disclose relevant information. At the same time, investors also need to regularly evaluate the ESG practices of their investment targets, supplemented by other management methods, to ensure that they always practice the concept of sustainable development in the company's development.

ESG investment strategies

At present, the Global Sustainable Investment Alliance (GSIA) has put forward seven mainstream ESG investment strategies based on observations of existing ESG investments in the market, which are highly recognized globally. These seven ESG investment strategies are as follows:

1. negative screeningInvestors exclude specific industries, companies, or businesses from their investment portfolio based on ESG standards. For example, investors who follow the principle of "ethical investment" may avoid investing in industries such as alcohol, tobacco, gambling, or arms.

2. Positive ScreeningInvestors tend to choose fields, companies, or projects with better ESG performance than their peers as an important basis for investment decisions.

3. Standardized screeningInvestors require investment targets to comply with internationally recognized minimum standards of corporate behavior.

4. ESG integrationInvestors systematically incorporate ESG factors in financial analysis, using qualitative and quantitative methods to comprehensively evaluate the potential value of investment targets.

5. Sustainable themed investmentInvestors focus on investing in companies that promote sustainability, such as clean energy, green technology, and sustainable agriculture.

6. impact investingInvestors make targeted investments in the private market aimed at addressing social or environmental issues, including community investments. This type of investment often flows to groups that traditional financial services cannot cover or enterprises with clear social and environmental missions.

7. Corporate Participation and Shareholder ActionInvestors use shareholder rights to influence the behavior of their investment targets by communicating with management, submitting proposals, or participating in voting, in order to make them more in line with ESG principles.

According to GSIA statistics, ESG integration strategies account for the highest proportion of global investment, followed by negative screening and corporate involvement and shareholder action. The diversity of these strategies reflects the flexible adaptation of ESG investment to the needs of different investors, while outstanding ESG performance also brings more diversified funding sources to the company.

Practical steps of ESG investment

Although ESG investment activities are similar in basic processes to general investment activities, they place more emphasis on the integration of ESG factors in each link. The following are the basic steps of ESG investment:

1. Clearly define investment objectivesWhen incorporating ESG factors into investment decisions, investors need to clarify their investment goals, such as complying with regulations, reducing risks, increasing returns, and meeting customer needs. These goals will guide the degree of integration of ESG factors in the future.

2. Building an ESG analysis frameworkInvestors need to establish an ESG analysis framework, including qualitative and quantitative analysis. By collecting ESG basic data and conducting qualitative analysis, such as determining the weights of different ESG factors in the investment portfolio; Meanwhile, utilizing data for quantitative analysis, converting ESG data into scores, and integrating them into investment models to screen investment targets or optimize investment models.

3. Select investment targets and implement investmentsBased on ESG investment objectives and analytical frameworks, investors screen potential investment targets and adjust valuation results according to their ESG performance, implementing investments within expected ranges.

4. Regular evaluation and optimizationInvestors need to regularly require investment targets to disclose ESG information, adjust ESG investment strategies based on the disclosed information, evaluate investment performance, and optimize investment behavior.

5. Continuously integrating ESG factorsThe integration of ESG factors should be integrated throughout the entire process of investment activities, from setting goals to establishing frameworks, to implementing investments and post investment management. ESG factors should be fully considered to ensure the sustainability and long-term value of investment activities.

Although ESG investment has formed some common views and practices, given that mandatory and universal international standards have not yet been established, and ESG investment pursues more diversified investment goals rather than a single short-term financial return, "specific problem specific analysis" will still be the main theme of ESG investment activities. In the future, with the continuous development and improvement of ESG investment, its standardization path will become clearer.