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Responsible investment terms: what is best-in-class investment?
Best-in-class investment means investing in companies that are frontrunners in meeting environmental, social and governance (ESG) criteria in their particular universe, asset class or category.
To understand a little more about the drivers behind best-in-class investment, we need to look at ESG more broadly.
Examples of the ESG criteria that companies and investors will consider are:
Environmental: Are renewable energies incorporated within the manufacturing process? Is there prevention from environmental and air pollution? Is the energy used clean and considers climate change? Is waste recycled?
Social: Does the company play a role in social development? Are human rights incorporated into business goals? Are industrial safety provisions in place?
Governance: Are corporate management goals transparent? Are shareholder rights protected?
Companies that apply this filter within their investment decisions are assessed on their success in implementing ESG goals in relation to their corporate profits. A score is generated that provides a best-in-class sustainability rating.
Therefore best-in-class winners are those that have specifically created a framework to help either ESG objectives. Mainstream energy companies that are actively developing alternative forms of clean energy would be an example.
Why best-in-class investment is a winner
– Companies that demonstrate effective environmental leadership gain a competitive advantage that will result in continuous strong financial performance
– Companies that host a track record of minimal environmental damages and penalties compared to their industry peers will benefit from lower environmental overhead costs in the future
– Best-in-class companies will create matching best-in-class technology, research and new investment positions which will strengthen their company as an investment
– By showing how their company benefits from sustainable and ethical practices and clean technology, companies that show strong ESG goals can positively influence others
– Ethical banks such as Triodos only invest in companies that achieve a best-in-class combination of ESG goals, positioning themselves in a securer investment position than their peers
Best-in-class investment is rapidly growing
Speaking to Blue & Green Tomorrow for The Guide to Sustainable Investment 2013, Francois Passant, executive director of the European Sustainable Investment Forum (Eurosif), said, “The sustainable and responsible investment industry is witnessing rapid growth across Europe.
“If you consider all six strategies defined by Eurosif, from sustainably-themed, best-in-class to norms-based, ESG integration, engagement and voting and exclusions, these have grown each at double-digit growth between 2009 and 2011.
“That growth, which of course covers various realities market by market, shows that institutional investors in particular are more and more recognising the importance of ESG factors.”
To read the full interview, as well as conversations with other key players from the sustainable investment industry, The Guide to Sustainable Investment 2013 can be downloaded here.
Further reading:
Responsible investment terms: what is ESG?
Responsible investment terms: what is sustainable investment?
Investment reports reveal widespread use of ESG integration
Framework launched to boost human rights awareness among investment firms