Incorporating ESG into an investment strategy
Environmental, social, and governance (ESG) investing has become increasingly popular in recent years, with investors seeking to invest in companies that prioritize sustainability, social responsibility, and good governance practices. In this article, we’ll define a roadmap for private fund managers to leverage this trend and incorporate ESG factors into their investment strategies.
ESG Investing Roadmap
Define ESG goals and objectives.
Private fund managers should consider investor values and industry specialization, along with the potential risks and opportunities. Incorporate in the discussion the impact ESG factors have on the investments, which will in turn impact the portfolio’s performance.
Identify ESG factors.
Which factors are relevant to the investment strategy? Example ESG factors include carbon emissions, labor practices, supply chain management, diversity, and executive compensation. Use ESG ratings and rankings to identify companies that perform well in ESG factors.
Conduct due diligence on current portfolio to assess ESG performance.
Managers should analyze companies’ policies, practices, and disclosures related to ESG factors. Private fund managers may be able to engage with companies to encourage improvement of ESG performance.
Integrate ESG into investment decisions.
Using ESG analysis, identify positive investment opportunities and avoid investments in companies that don’t meet the criteria. Private fund managers can also use ESG analysis to manage risk, as companies that perform poorly in ESG factors may be more vulnerable to financial, reputational, and regulatory risks.
Monitor and report on ESG performance.
Private fund managers should continue to monitor companies’ ESG performance regularly and engage with them to encourage improvement. Communicate ESG performance to investors, demonstrating how ESG has been incorporated into investment strategies and the impact of ESG on the portfolio’s performance.
Incorporating ESG factors into investment strategies may feel like a foreign concept to many private fund managers. However, it can provide a competitive advantage as investors increasingly prioritize ESG considerations. Incorporating ESG into investment strategy can help private fund managers generate better returns and promote sustainable, responsible investing.
Keiter’s Financial Services industry team stays current on new trends impacting investment fund managers and advisors. We will keep you updated on ESG and other business planning opportunities. Questions on leveraging ESG for your firm? Contact your Keiter Opportunity Advisor or Email | Call: 804.747.0000.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.