The responsible investing spectrum: from exclusion to impact

Intuition

Two funds can both call themselves "responsible" and still do completely different things. One may simply avoid alcohol and tobacco shares. Another may use ESG data to spot risks that other analysts miss. A third may buy only companies whose products help solve a social or environmental problem. A fourth may put money into a rural health clinic and measure the lives it improves.

It helps to see these approaches as a spectrum. At one end, investors are mainly protecting their own returns from ESG risks. At the other end, investors are mainly trying to change outcomes in the world, and may accept lower returns to do so.

Knowing where a fund or strategy sits on the spectrum tells you what it is really promising. Most confusion, and much greenwashing, comes from mixing up the ends of the spectrum.

Mechanics

The spectrum

Approach	Main aim	What it does	Typical tools
Traditional investing	Financial return	Ignores ESG unless it shows up in the numbers	Standard analysis
ESG integration	Better risk-adjusted return	Builds material ESG factors into analysis and valuation	Materiality maps, adjusted forecasts, scenario analysis
Exclusion (negative screening)	Avoid harm or reputational risk	Leaves out sectors or companies, such as tobacco, weapons or thermal coal	Revenue thresholds, controversy lists
Norms-based screening	Avoid serious misconduct	Leaves out companies that breach global norms, such as the UN Global Compact	Controversy research
Best-in-class (positive screening)	Back the leaders	Picks the companies with the best ESG performance within each sector	ESG scores, sector ranking
Thematic investing	Gain exposure to sustainability trends	Buys companies whose business serves a theme, such as clean energy or water	Revenue mapping, green revenue share
Impact investing	Measurable positive impact alongside return	Funds activities with an intended, measured social or environmental result	Theory of change, impact metrics, often private markets
Philanthropy	Impact only	Gives money with no financial return expected	Grants, donations, ZCZP instruments

Stewardship sits across the spectrum

Engagement with companies and voting at shareholder meetings can be added to almost any approach. An index fund that cannot sell a stock can still vote against a bad related-party deal. A thematic fund can still push its holdings to disclose more.

Mapping SEBI's ESG fund strategies

SEBI's July 2023 rules allow mutual fund ESG schemes under six strategies. They map onto the spectrum like this:

Exclusion: exclusion and norms-based screening.
Integration: ESG integration.
Best-in-class and positive screening: best-in-class.
Impact investing: impact investing, though listed equity funds have limited ways to show impact.
Sustainable objectives: thematic investing.
Transition or transition-related investments: companies moving from high to lower emissions, which sits between integration and thematic investing.

The global framework

The Principles for Responsible Investment (PRI), launched with UN backing in 2006, is the main global network for responsible investors. It has more than 5,000 signatories. Its six principles commit signatories to build ESG issues into analysis, be active owners, seek ESG disclosure from companies, promote the principles, work together and report on progress. Signing the PRI shows a commitment to integration and stewardship. It does not mean every fund of the signatory is an ESG fund.

The responsible investing spectrum: from exclusion to impact

Intuition

Mechanics

Sources

From the research

A Comparative Financial Analysis of Three Listed Companies

IPO Issue Price vs. Listing Price vs. Subsequent Performance

Paytm: Valuing a Company With No Clean Comparable

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