ESG investing roadmap: Part 1

There is increasing awareness among investors of the important role that responsible investing plays in a well-diversified portfolio. Fiduciaries today recognize that environmental, social and governance (ESG) risk factors can materially impact portfolio performance, as well reflect an organization's broader values. The difficulty lies in knowing how to integrate ESG principles and where to begin. In this three-part series, we’ll look at how you can start building a robust responsible investing framework for your organization

Responsible investing at Russell Investments

We’re a signatory to the United Nations-supported Principles for Responsible Investment (PRI). That means Russell Investments has a firm commitment to responsible investing and we recognize its importance to our investment process. We believe ESG issues drive value and mitigate risk, and that responsible investing and performance can be complementary.

Principles of good stewardship are integrated throughout our investment process, via our research efforts, portfolio management and implementation of proprietary investment solutions. We support our clients integrating ESG issues into their investment process, while acknowledging that these priorities might be different for every investor.

Responsible investing roadmap: Best practices

From our experience, we recommend five key steps on overarching best practices for establishing a responsible investing framework.

1. Educate your team

You must educate yourself and your board (or investment committee) on the meaning of responsible investing. You’ll need to be aware of the latest trends and the different kinds of implementation strategies. It's critical to prepare your team members and supply them with knowledge to make informed decisions.

2. Define your beliefs

Responsible investing can be interpreted in different ways, so you must be clear on your beliefs and desired outcomes. Whether you’re aiming to align with stakeholder values, mitigate risk, or comply with regulations, you’ll need a robust framework with real integrity. It’s also important to document your responsible investing beliefs and decisions in your investment policy statement (IPS), capturing these for institutional memory.

3. Implement your beliefs

Approaches to ESG integration include (but are not limited to) exclusions or negative screening, positive selection, active ownership and impact investing. Each approach has its own degree of effectiveness in supporting ESG principles. You may choose to utilize one or multiple approaches. Later in this series, we’ll consider each of these approaches in turn.

4. Set up a reporting framework

To have a successful responsible investing framework, you’ll need to monitor and measure how well your ESG policies are implemented within your investment portfolio.

5. Communicate and collaborate

Effective communication of your efforts to your stakeholders will help to maintain confidence in the framework. You may also want to seek out and collaborate with organizations that share your values. At Russell Investments, we partner with organizations to promote the inclusion of sustainability in investment processes, such as the PRI, Climate Action100, Investors Group on Climate Change (IIGCC), Carbon Disclosure Project (CDP) and the Task Force on Climate-related Financial Disclosure (TCFD).

The bottom line

ESG principles are no longer just a nice to have. There is a growing understanding of how sustainable investments can enhance portfolio outcomes and reflect the values of investors.

Integrating these principles into your business isn’t easy, with changing trends and varying priorities between individuals. In this three-part roadmap, we’ll offer key definitions, overviews of best practices and practical suggestions for your ESG framework.

In part 2, we’ll look in more detail at education and the importance of defining your beliefs. In part 3, we’ll delve into the different implementation methods and how to keep yourself honest through robust reporting.