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Key Considerations for Responsible Investing Initiatives

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Executive Summary

While a number of investors are increasingly interested in responsible investing (RI), with a particular emphasis on environmental, social, and governance (ESG) integration, many remain concerned about whether responsible investing will be beneficial to their investment portfolios.

When it comes to launching a responsible investing initiative, there are a number of issues for investors to carefully consider, including local regulatory guidelines, cost, and the financial incentives (or disincentives) for doing so.

This paper offers an analysis of the issues that should be reviewed prior to engaging in a responsible investment initiative, including:

  • What are the drivers of responsible investing?
  • How do different regulatory regimes view responsible investment initiatives?
  • Responsible investment options: What is meant by the following terms?
  • How can different types of responsible investing affect investment returns?
  • Are there additional hurdles for responsible investing initiatives?

We conclude that responsible investing is indeed a growing trend, driven by both top-down and bottom-up demand. We also identify the four types of responsible investing, as well as performance data that supports the use of carefully selected RI strategies. In fact, while investors that utilize negative screening techniques need to consider both tracking error and shareholder engagement risk, the available data suggests that value-neutral strategies, like ESG integration, should have a neutral to slightly positive impact on performance.

Finally, while regulatory requirements should be a significant concern for investors, the guiding principle of most jurisdictions seems to be that RI and ESG investing are not prohibited as long as investors always consider financial prudence first. There are, however, other factors to consider besides regulatory prudence, including lingering issues with data, “greenwashing,” and portfolio construction. Nevertheless, Aon does believe that investors can mitigate these issues, prudently implement RI strategies, and achieve desired sustainability outcomes without forfeiting their fiduciary duties.

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This document has been produced by Aon’s Global Investment Management (GIM) Research Team, a division of Aon plc and is appropriate solely for institutional investors. Nothing in this document should be treated as an authoritative statement of the law on any particular aspect or in any specific case. It should not be taken as financial advice and action should not be taken as a result of this document alone. Consultants will be pleased to answer questions on its contents but cannot give individual financial advice. Individuals are recommended to seek independent financial advice in respect of their own personal circumstances. The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. The information contained herein is derived from proprietary and non-proprietary sources deemed by Aon to be reliable and are not necessarily all inclusive. Aon does not guarantee the accuracy or completeness of this information and cannot be held accountable for inaccurate data provided by third parties. Reliance upon information in this material is at the sole discretion of the reader.

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