Before starting the exercise, it is key to define its objectives when investing in sustainable portfolios:
Sustainability labels are designed to provide transparency to investors regarding ESG quality of investment strategies. As a matter of fact, sustainability labels are « an all European affair ». In addition to generalist labels, investors can encounter specialised sustainability labels such as green or impact labels. All in all, sustainability labels are useful instruments to help investors identifying the investment strategies, which truly integrate ESG aspects into their investment process and their portfolios.
They are imposing strict eligibility criteria. Hence, prior to selecting a sustainability label, it is important that investors reviews these eligibility criteria in the light of their own extra-financial investment objectives.
Over the past years, a new ecosystem of so-called extra financial research providers has emerged. ESG scores generally result from industry specific sustainability rating models that group a wide set of environmental, social and governance criteria into one score. Typically each company is rated on each ESG criteria which is deemed relevant for its industry. The methodologies and the relevant data access could present some weaknesses. However, ESG score could be a good proxy to have a first insight on the sustainability commitment of a company. Nevertheless, the devil is in the details and ESG scores should not be used blindly to assess the sustainability level of a portfolio. Qualitative assessment and the perspective from the impact as well make also part of the picture.
Beyond a rating or a score, the actual impact of the investments – might be negative and/or positive – is also – if not the most relevant – important in terms of sustainability. Impact measurement metrics typically focus on the actual sustainability achievements of companies, independent of their ESG commitment assessed by adopted policies and programs.
The very nature of the company’s activity is key information to investors to enable them to decide which activity they want to finance and the sustainability impact they might have.
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