REGULATORY MARKETS & INVESTING EXPERTISE

Lorenzo La Posta , CFA Portfolio Manager Momentum Global Investment Management

Many shades of green When it comes to incorporating sustainability considerations into investment decisions , there is a growing consensus on the importance of doing so , both from a responsibility perspective ( position your investments to have an impact ) and from a financial return perspective ( position your investments to benefit from sustainable characteristics ). However , there is still ongoing debate and little agreement on the best approaches to do so and several different methodologies are being used , each with its own pros and cons :

1 . Sector exclusions The first method is sector exclusions , which involves excluding specific industries or sectors from investment portfolios based on their negative environmental or social impacts . For example , investors may choose to avoid companies involved in tobacco , weapons or fossil fuels . The advantage of sector exclusions is that it provides a straightforward way to align investments with sustainability values , but it can limit diversification and potentially restrict opportunities for engagement and positive change within those industries .

2 . Company exclusions Controversy exclusions represent another approach . This methodology involves excluding companies that are involved in controversies related to environmental or social issues , such as child labour or human rights violations . By avoiding those , investors aim to promote responsible practices . However , determining the extent and severity of controversies can be subjective , and there may be challenges in obtaining accurate and timely information .

3 . ESG risk mitigation Environmental , social and governance ( ESG ) risk mitigation revolves around considering and quantifying how ESG factors can materially impact a company ’ s financial performance . This approach provides a comprehensive assessment of a company ’ s sustainability performance and its potential impact on investment returns . However , there may be challenges in accurately measuring and quantifying these factors , as well as variations in methodologies used by different investors and data providers .

4 . Reducing the environmental footprint of the investment companies By investing in companies that actively work towards environmental sustainability , investors can contribute to positive change , but setting reduction targets and accurately measuring environmental impacts can be complex and require ongoing monitoring and verification . Measuring and increasing impact towards the United Nations ’ Sustainable Development Goals ( SDGs ) is gaining traction as a methodology for sustainable investing . This approach aligns investments with specific SDGs , such as poverty alleviation , gender equality and climate action . By directing capital towards companies that contribute to these goals , investors aim to generate positive social and environmental outcomes . However , defining measurable impacts and assessing the alignment of investments with the SDGs can be challenging , even more than with ESG risks .

5 . Active engagement Lastly , voting and engagement play a crucial role in sustainable investing . This methodology involves actively using shareholder rights to influence companies ’ practices and policies through voting on resolutions and engaging in dialogues with management . It allows investors to drive change from within and hold companies accountable for their environmental and social performance . However , it requires dedicated resources and expertise to effectively engage with companies and promote sustainable practices .

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