Updated: Jun 22
A growing number of LP's are interested in Environmental, Social and Governance investing, known as ESG. In 2019, $715B was invested by LP's into funds of $50M+ which is a 12 month 44% increase. The entire US VC market is only $125B by comparison even with their record highs reported in 2021. If you are a fund, family office or impact investor this is where you need to implement an ESG strategy to stay relevant and ahead of the ESG global compliance underway. That term is becoming more common, but ESG still means different things to different people. While some investors are drawn to the socially responsible side of ESG investing — a more emotionally- driven, morals-based approach that aims to create a portfolio that aligns with the investor’s values — others approach ESG factors as a way to evaluate risks and opportunities and create more sustainable portfolios.
Once you’ve figured out why your LP's are drawn to ESG and what they hope to get from it, you can more easily evaluate the methods for adopting an ESG investing strategy that best fits your funds goals. Because there are a lot of approaches that you can choose from, each with very different objectives. Understanding different ESG implementation methods is the next critical step in determining the best fit for your portfolio. We're proud to be the trusted impact driven platform to empower a world of impact and profits Live. in real time.
Here’s a closer look at six different methods for incorporating ESG criteria into your fund strategy — along with their respective advantages and potential downsides — to help you decide what’s right for your impact goals:
1. Exclusionary Screening This is the oldest method and often the first approach that people think of when they hear “ESG,” “sustainable,” or “socially responsible” investing. Exclusionary screening involves removing companies from your portfolio based on products or business activities that conflict with your values. That might include businesses associated with alcohol, tobacco, gambling, or weapons manufacturing, just to name a few examples.
Pros: Negative screening lets you align your investments with your beliefs and values. This approach allows you to participate in the all markets on your own terms, and that’s better than keeping 100% of your money in cash.