Clearing the Air: Responsible Investment

Abstract

Over the last several years, responsible investment/environmental, social, and governance (ESG) investing has gained prominence among institutional investors and indeed the broader investment industry. Asset owners have made this topic more central to investment decisions as they are increasingly concerned with both their fiduciary responsibility to deliver financial results and the nonfinancial impact on their constituents and the broader global community. Today, responsible investing’s reach is vast. However, so too is confusion around the meaning of the concept. This is unsurprising, given the many different motives for and approaches to considering ESG factors and many different opinions about exactly what they include. The authors therefore seek to “clear the air,” providing a framework of the various approaches and terms necessary to have an informed discussion and investment policy on responsible investment.

TOPICS: Portfolio theory, portfolio construction, ESG investing

Key Findings

• • Although interest in responsible investment and ESG is vast, so too is confusion about what they entail.

• • The authors propose a framework for responsible investment, seeking to “clear the air” for more-informed discussions.

• • The framework defines both responsible asset selection and responsible ownership.