ESG? Sure, we do that.

Jon Hale
Jon Hale
Jul 21 · 4 min read

As more and more asset managers integrate ESG into their investment process, the line between traditional and sustainable investments has gotten blurry.

One problem is the growing use of “ESG” as the umbrella term to characterize what I think is better called, simply, “sustainable” investing. (The all-inclusive “sustainable, responsible, and impact” investing works, too. It’s a clever re-use of the SRI initials that links to the earlier “socially responsible investing” terminology. But it’s also a mouthful and may bring up negative connotations surrounding traditional SRI, which relied on exclusions and not on ESG evaluations of issuers.)

The problem with using ESG to describe the overall field is that ESG also more literally describes something narrower — the incorporation of ESG criteria into any investment process. Many traditional asset managers have incorporated ESG into their investment process over just the last couple of years. For their mutual funds they have begun adding information about how they use ESG in fund prospectuses, usually simply a line or two indicating that ESG issues are being formally considered as part of the investment process, which is otherwise unchanged.

It would be a stretch to call these traditional funds-considering-ESG as full-fledged ESG funds. It used to be that sustainable investments were the only types of investments to incorporate ESG, so it didn’t matter whether they were called sustainable or ESG. Today, ESG incorporation can and does occur within both sustainable and traditional investments.

That’s all to the good, and makes sense at a time when companies face a range of sustainability challenges that have material implications on their financial success. ESG analysis helps investors form a more accurate understanding of a company’s risks and opportunities. More asset managers realize that the full consideration of material ESG issues results in a more-complete investment analysis.

So what is the difference between a sustainable fund and a traditional fund that incorporates ESG criteria? A sustainable fund has a bigger-picture objective, often described as one that aims to achieve both competitive long-term financial performance and impact. Sometimes impact is a specific thematic goal like furthering gender diversity or identifying climate solutions; sometimes impact is about measuring a range of effects the portfolio holdings have on social, environmental, or economic systems. Or, most importantly in my opinion, impact can be about the asset manager’s engagement with companies on ESG issues and how the asset manager votes its proxies on ESG-related items.

I think of it this way: a sustainable investment aims to invest in issuers that exhibit strong climate and environmental stewardship, concern about the well-being of multiple stakeholders (customers, workers, communities), and good corporate governance practices.

Note: Numbers in parentheses refer to mutual funds available to U.S. investors

The methods a sustainable investment uses to get there include the full integration of ESG considerations in security selection, portfolio construction, and shareholder engagement. They may also use exclusions and have specific impact goals.

By contrast, traditional funds that incorporate ESG typically do so in a fairly limited way. Some asset managers are also ramping up their stewardship activities, so I can see a future state in which many traditional asset managers tout their sustainability bona fides as consisting of limited ESG incorporation across their strategies and being more-active owners by increasing their ESG engagement activities.

The House took up the issue of ESG disclosure at a hearing July 10th. Here’s an overview:

And here’s the testimony of Ceres president and CEO Mindy Lubber on the Climate Risk Disclosure Act:


Public disclosure of sustainability and climate risk information is not just about the act of reporting. The value of this disclosure is two-fold. First, if the data provided is robust and comparable, it can meet the needs of investors and other stakeholders for information about sustainability risks and opportunities facing companies, and the sustainability risks those companies impose on society.

Second, disclosure is valuable for its ability to stimulate ingenuity and strategic thinking by businesses, which can improve sustainability performance, increase a company’s competitiveness in a resource-constrained economy and create shareholder value. Ceres’ research has found examples of companies that provide good discussions of climate risks in financial filings and also undergo in-depth analysis of the strategic risks and opportunities from climate. (bolded emphasis mine)

The recent report by the Transition Pathway Initiative says half of companies in high GHG-emitting sectors are not adequately integrating climate change into their business decisions.

An overview of how REITs are addressing sustainability issues from NAREIT industry group:

The ESG Advisor

Incorporating sustainability and impact into your investments

Jon Hale

Written by

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.

The ESG Advisor

Incorporating sustainability and impact into your investments

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