At its heart, sustainable investing involves looking at the investment universe from either an exclusive or inclusive perspective.
- An exclusive, or negative, approach seeks to avoid certain investments in an investor’s portfolio that do not meet certain criteria. Investment performance is often not the main objective of this approach. Rather, investors generally want to avoid investing in companies that do not align with their values or ethics.
- An inclusive, or positive, approach seeks to use ESG factors throughout the investment process in an attempt to add alpha. Investment managers following a positive approach purchase certain stocks or bonds they believe will outperform at least in part, due to a company’s positive ESG practices. The same managers will analyze ESG factors to avoid the stocks and bonds of certain companies with poor ESG profiles.
In both cases, managers are using ESG factors not only to meet the stated investment objectives, but to seek to improve investment performance—either by buying the “best” securities or by avoiding the “worst” securities within an investment universe.