Strategic Options

Investors who are looking to pay greater attention to the ESG issues and risks around their portfolios have five strategic options:

The Minimalist Strategy

Do nothing but ensure that you have evidence that the investment is obeying the relevant laws and regulations, and has processes in place to prevent breeches, but nothing more. This can be the first step in a journey along a spectrum of ESG maturity. As you progress further – or are driven to do so by evolving.

The Exclusion Strategy

This simply stops investment in certain names, companies, or whole industries, or in companies based in particular geographical focus. This strategy will not address the risk of underlying ESG exposure in non-excluded investments, and it may lose opportunity of being involved in projects that are changing the ESG profile or standards in an industrial sector or a country. It has the benefit of simplicity but cannot reduce risk significantly against underlying ESG problems. This option can be referred to as “negative” ESG – an avoidance approach that is tactical at best, and will leave value and opportunity untapped. A trusted and neutral assessment framework could be critical to your shift to a more strategic and proactive approach to ESG.

The Passive Selection Strategy

Target companies who fulfil the requirements of named ESG schemes, or have exceeded predetermined levels in ESG ratings. This issue is usually combined with a parallel exclusion strategy. It carries a significant risk in that it relies solely on the purpose of the relevant rating system and on appropriate reporting by the company. We can review your current approach and toolsets, optimize their use and facilitate a shift to a more neutral assessment model.

The Active Selection Strategy

Based on a company’s ESG investment and risk strategy, and direct ESG assessment and validation (often using external indicators but not beyond the scope of their purpose). For this a company needs to assemble the ESG investment strategy that can run alongside the financial strategy. They must be seen as mutually reinforcing perspectives on the investor’s purpose, activity, and performance. We can assist in devising a highly strategic, metrics and outcomes-based ESG leadership and investment model aimed at optimizing value and taking a leading posture in ESG aligned activity and branding.

Impact Strategy

Where the investor might seek out companies whose purpose is to advance particular ESG goals, often built around the UN Sustainable Development Goals. Impact investment is a form of activist investment and one where the development of intermediaries is most advanced. This is high profile work and one where ESG risks have to be carefully identified and addressed to mitigate reputational damage.

Next steps...

We are committed to the advancement of ESG practices, standards and disciplines around the globe. We provide objective, independent advisory services, research, analysis and thought leadership, and advocacy on ESG, sustainability and related areas.

ESG Validation engages with a variety of clients, including company boards and executive leadership, CSR, ESG and sustainability teams, as well as investors seeking to better understand the ESG claims (and substantive actions and behaviours) of corporates. We work with government, public sector and international institution clients as well as regulatory and standards organisations, investment and asset managers, business leaders and others committed to bringing ESG to the core of commercial, investment and policy activity. We apply a disciplined, independent posture in the market, which enhances the probity of the advice we offer to our clients.

Find out more, download our pdf: 'Navigating the Maze'