Morningstar - Q4 2021 - 17

EXHIBIT 1
A Range of Approaches Investors have several ways to address sustainable investing, from applying exclusions to
assessing impact.
Motivations
Control Risk
Consider ESG risks
Approaches
Portfolios
Apply
Exclusions
Improve Investments
Enhance Returns
Seek ESG opportunities
Limit
ESG Risk
Seek ESG
Opportunities
Supporting Role: Consider some ESG information
as part of the regular investment process.
Improve the World
Do No Harm
Avoid negative impact
Practice Active
Ownership
Target
Sustainability
Themes
Make a Difference
Seek positive impact
Assess
Impact
Leading Role: Emphasize sustainable investment
approaches as central to the investment process.
AVOID NEGATIVE OUTCOMES
ADVANCE POSITIVE OUTCOMES
context: Investors, whether they are
individuals or institutional decision-makers, are
people, and more people in the world today
have sustainability concerns.
They are expressing those concerns more
often in the decisions they make-in other words,
focusing on the systemic impacts of their
decisions-be they consumer choices, career
decisions, or location and lifestyle choices.
It should come as no surprise that those who
are fortunate enough to be investors or
who have the responsibility of being investment
decision-makers for institutions increasingly
want to apply a sustainability lens to
their investments.
They wish to do so because they believe
this can improve their investments as well as the
world. The two ideas are connected. For
investments, a sustainability lens can help control
risk and identify new investment opportunities.
For the world, a sustainability lens can help
investors avoid contributing to negative outcomes
and help advance positive outcomes for people
and planet.
Investment Approaches
The assumption that sustainable investing
is a single, unified approach has led to
confusion and a mismatch between investor
expectations and investment outcomes.
It is more accurate to say that sustainable
investing covers a range of approaches
that are used to apply a sustainability lens
to investments.
We have identified six distinct approaches
and placed them along a continuum ranging from
those that lean more toward avoiding negative
outcomes, be they investment or realworld
outcomes, to those that lean more toward
advancing positive outcomes (EXHIBIT 1 ):
1 Apply Exclusions refers to excluding issuers
based on certain products/services, an
industry, or certain corporate behaviors, like
major controversies.
2 Limit ESG Risk refers to using ESG information,
usually in the form of ESG ratings of companies, to
assess material ESG risks as part of the overall
assessment of risk.
3 Seek ESG Opportunities refers to using ESG
information to identify companies that are
sustainability leaders (often by industry or sector),
improving, or using sustainability to
establish or enhance a competitive advantage.
This approach includes what is sometimes
called " ESG best in class " or " positive screening "
based on ESG ratings.
4 Practice Active Ownership refers to seeking
positive ESG outcomes via active ownership
activities, primarily made possible because asset
managers are shareholders in public companies.
These activities may include:
gEngaging directly with companies on ESG issues.
gProposing ESG-related shareholder resolutions.
gSupporting ESG issues through proxy voting.
gParticipating in ESG-related investor coalitions.
gAdvocating for public policy measures that address
sustainability concerns.
5 Target Sustainability Themes refers to
identifying investments that stand to benefit
from the long-term trend toward greater
sustainability in the way we live and work. Such
themes may include environmental-related
morningstar.com/lp/magazine
17

http://www.morningstar.com/lp/magazine

Morningstar - Q4 2021

Table of Contents for the Digital Edition of Morningstar - Q4 2021