Practitioners newly exposed to ESG may need clarification about ESG and its performance because some are already implementing it but need to learn. ESG is a framework that businesses have adopted to help them maximize the good and minimize the bad in their daily operations.
A proposed rule seeks to clarify the mass of ESG funds, products meant for investment, and current market strategies.
The rule also aims to group ESG into three categories.
- ESG integration
- ESG-focused
- ESG – impact
This article covers everything you need to know about ESG integration and ESG impact and how the difference matters to investors.
ESG Integration vs. ESG Impact
ESG (Environmental, Social, and Governance) is a framework and methodology that enhances fiscal and non-financial performance. As part of the criteria, all aspects of the business are considered, including financial reporting and business plans. Integration is the commitment to applying the requirements of ESG to an investment strategy.
On the other hand, ESG impact helps businesses implement and improve their ESG performance. In short, ESGI is concerned with enhancing portfolio performance via ESG analysis and strategy.
Why Should Businesses Understand ESG Integration?
Among the proposed amendments relating to ESG, ESG integration is the least committed to the ESG issues that define socially conscious investing. Any strategy that includes ESG factors can be considered integration because ESG factors are critical to investment analysis.
Either way, ESG integration is optional to look at every issue. Managers are permitted to include or exclude an ESG integration security fund because sometimes an intelligent choice may not necessarily equate to positive returns.
The Proposed Changes for ESG
Any fund that labels itself ESG should provide sufficient evidence to support its claims. In addition, an ESG fund will have to indicate in writing how the fund links with ESG factors while selecting its investment selection. This will show what ESG factors the fund considers.
ESG Impact
According to the proposed amendment, an ESG impact strategy must meet specific criteria like having a goal that seeks to achieve a particular ESG impact or having an impact that generates an ESG-related clear benefit.
An ESG impact fund that declares its goals and objectives to finance an affordable housing unit or one that enhances clean water treatment and delivery is a perfect example of an ESG impact fund.
Proposed Changes for ESG Impact
ESG impact funds will be subject to the exact requirements of ESG integration and ESG-focused funds. As such, ESG impact funds will have to clarify the time horizon of a project. They will have to define how the fund measures progress to a stated impact and the relationship between the funds’ goals and financial returns.
Additionally, ESG impact funds must include their procedures for measuring progress by utilizing Key Performance Indicators similar to those of other ESG funds. Furthermore, the prospectus must also have an overview and a detailed progress report.
Keeping Current With ESG
Understanding the difference between ESG impact and ESG integration is critical for investors because they will be aware of the current trends surrounding ESG. The proposed rules for ESG are crucial in determining how businesses and investors will view ESG in the future.
