ESG integration and ESG focused are two types of funds that both invest in companies that have strong environmental, social, and governance (ESG) policies. The key difference between the two is that an ESG focused fund invests in only companies with ESG practices, while an integrated fund invests in companies with good ESG policies and those without them.
This article looks deeper at ESG integration and ESG-focused approach and how to differentiate between the two concepts.
ESG integration framework is a system for integrating ESG factors into investment decisions. Unlike ESG-focused strategies, which require investors to hold specific stocks or funds, ESG integration is more flexible and is used by both active and passive managers.
However, it’s important to note that there are different schools of thought on how companies should incorporate an ESG integration framework into their investment processes.
Some firms will only use them as a secondary filter for certain investments like those that affect the environment or labor rights issues. Others will incorporate an entire framework of measurements into their due diligence process so they can evaluate everything from management behavior to corporate governance standards before making an investment decision.
ESG-focused funds are actively managed funds seeking to generate returns while pursuing positive social and environmental impact. These funds will typically invest in companies with strong ESG profiles to maximize their potential for long-term performance.
A key difference between an ESG-focused and an ESG-integrated fund is that the investment manager of a focused fund needs to actively manage investments rather than simply screen for stocks or bonds with high levels of sustainability considerations already built into them.
As such, these managers have more latitude over which assets to choose from than those simply integrating ESGs into their current strategies.
ESG-focused funds are designed to meet specific ESG criteria. For example, some ESG-focused funds may invest only in companies with high levels of renewable energy or low carbon footprints. ESG-integrated funds integrate ESG factors into their overall methodology and select investments accordingly.
While ESG is a hot topic among investors, both types of funds require some research and thought on the part of the investor. There are many benefits to choosing one over the other. For example, ESG-Focused funds tend to be more concentrated in their holdings and therefore carry less risk than an ESG-integrated fund.
An ESG-focused fund has a more limited investment universe than an integrated fund, but it can be easier for investors to understand where their money is going because they can see how each company performs on ESG criteria.
An ESG integration framework and ESG-focused funds can be used to invest in companies that positively impact society and the environment, but they do so in different ways.
ESG integration is a strategy that allows investors who want to invest in socially responsible companies to invest alongside other stocks with no regard for their environmental or social impacts.
ESG-focused funds, on the other hand, are designed specifically to allow investors to choose investments based on their values, goals, and risk tolerance while still getting the diversification benefits of an index fund.