Environmental Factors in Investment Analysis

Pollution prevention, energy efficiency, reduced emissions, and adherence to environmental safety and regulatory standards are some of the key environmental factors which are considered in the investment analysis process.

Concerning the influence of social factors on investment, the investment analysis process usually focuses on human rights issues and welfare concerns in the workplace. In addition, investment analysts consider the impact of product development on the community.

ESG Implementation

ESG integration can be implemented through several methods, namely negative screening, positive screening, best-in-class, thematic investing, and impact investing.

Negative screening or exclusionary screening describes the practice of excluding certain sectors or companies from investment consideration due to the nature of their underlying business activities or other environmental or social concerns.

Positive screening and best-in-class strategies select investments that have favorable ESG characteristics. Positive screening focuses on companies that embrace positive ESG-related principles such as companies with policies promoting pollution prevention. The best-in-class approach seeks to identify companies that record the highest ESG score in their industry.

Thematic investing emphasizes a single factor, such as energy efficiency or climate change.

Impact investing seeks to achieve targeted social or environmental objectives along with measurable financial returns through engagement with a company or by directly investing in projects or companies. It can be executed through various asset classes and investment vehicles such as venture capital investing. Impacting investing is often based on direct transactions.

Question

Which of the following is least likely an ESG implementation method?

A. Worst-in-class

B. Positive screening

C. Impact investing

Solution

The correct answer is A.

Worst-in-class is not the name of an ESG implementation strategy. On the flip side, best-in-class describes an ESG approach which seeks to identify the best ESG-scoring companies in each industry. B and C are incorrect because positive screening and impact screening are both examples of ESG implementation methods.

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Describe how environmental, social, and governance factors may be used in investment analysis