Practical Applications of Three Pillars of Modern Responsible Investment

Practical Applications Summary

In Three Pillars of Modern Responsible Investment, from the 2020 ESG Special Issue of The Journal of Investing, Lloyd Kurtz of Wells Fargo Private Wealth Management dives into the three key tenets that support modern “responsible investment” activity. The first is alignment of portfolios with client interests. Alignment is usually accomplished through exclusions. The second is integration of environmental, social, and governance (ESG) factors into investment decision making. Integration emphasizes identifying factors that have a material influence on a company’s financial performance or valuation. The third is impact—achieving positive change though active ownership, usually in the form of engagement with corporate management.

Evidence shows that exclusion-based alignment strategies can be applied without sacrificing the ability to closely track standard benchmarks. There is conflicting evidence as to whether asset managers can generate alpha based on integration of positive ESG factors, but somewhat stronger evidence exists to show that they can identify and manage risk based on negative ESG factors. Finally, some evidence supports the tenet that impact activities can produce improved financial results.

TOPICS: ESG investing, portfolio theory, portfolio construction