Investors are always looking to gain the upper hand when investing. This generates a constant pursuit of data and information which can offer that. Since traditional analysis does not always tell the entire story, investors also seek out alternative data which can shed light on a target investment. This is why ESG has been an important trend over the last decade. Investors want to see alternative data on companies which provide different perspectives of a company’s strengths or weaknesses and its resilience in the face of future challenges.
We understand the importance of ESG. Our partnership with ESG Book will enable you to see ESG scores for more than 2,700 stocks on our platform. The scores can serve as the basis for incorporating ESG considerations into your investment decisions.
So, how can you use ESG data as part of your investment strategy? Here are five options.
Impact investing
This investment strategy aims to achieve positive environmental or social impact in addition to financial returns. Here, investors provide capital to address the world’s major challenges by investing in areas such as renewable energy, sustainable agriculture, healthcare, and education. In this category, investors can focus on a broad issue, or they can choose a specific issue from one of the ESG categories. For example, investors can focus on waste management companies and compile a list of all of the companies that address this issue as it relates to the environment.
ESG integration
This strategy involves combining ESG data with traditional financial analysis when making investment decisions. With this approach, investors integrate ESG factors and traditional factors to assess the risk/reward profiles of potential investments.
Inclusionary screening
With this approach, investors screen the market for companies that meet certain ESG criteria. For example, an investor could seek out the companies in a specific sector that have the highest ESG scores.
Exclusionary screening
This approach is based on the exclusion of companies or sectors whose behaviours do not align with ESG principles. Using an exclusionary approach, an investor may screen out companies operating in industries such as tobacco, weapons manufacturing, gambling, and fossil fuels.
Portfolio lean
In this strategy, investors allocate part of their portfolio using traditional investment considerations, and the other part of the portfolio using ESG considerations. However, the idea is to have the portfolio lean more in the direction of ESG investments as opposed to non-ESG investments.
ESG can add value
One of the advantages of using ESG investment strategies is the ability to incorporate added value into your investments. We all invest because we want to make profits. ESG provides you with alternative data to expand on the way you analyse companies prior to investing — which could potentially reveal new investment options which would not have been visible based on traditional analysis. You can read more about how to use ESG scores here.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.