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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?
- Socially responsible investing (SRI)
- Environmental, social, and governance (ESG) integration
- Impact investing
- Mission-related investing (MRI)
- 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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