ESG has become mainstream in funds management but it shouldn’t be confused with ethical investment.
ESG integration is a branch of investment analysis that assesses companies on their environmental and social impacts as well as the quality of their governance. It is a tool used by investment managers to gauge the long-term financial health of companies. For example, a company that pollutes the environment could face financial penalties as well as damage to its reputation – both of which could affect the company’s profitability.
In this sense, ESG integration is ethically passive: it is concerned about the financial impact of things like pollution, poor labour practices and a lack of diversity on boards – not whether they are right or wrong.