Impact Investing: Beyond ESG!

Sustainable investments continue to grow rapidly. For nine years in a row, Switzerland experienced a double-digit growth in sustainable investments. The most commonly used of all sustainable investment approaches is the integration of environmental, social and governance (ESG) factors right before ESG Engagement and Exclusion.1 When applying Engagement, shareholders initiate a conversation with the goal to convince the management of the affected firm to improve their ESG performance. With the Exclusion approach, companies are excluded from the investment universe based on exclusion criteria which can be related to product categories, activities, or business practices. In a survey with over 600 asset managers, the most often mentioned reason for them to include ESG data in their investment process was the expectation of a better investment performance. When it comes to impediments to include ESG into the investment process, the biggest barriers arose from the lack of comparability of firms as well as the lack of reporting standards for ESG criteria. 2

Even though many asset managers take the ESG ratings of firms as given, huge divergences between rating providers exist: An overall correlation between the six most popular ESG rating providers of 0.46 can be observed, which demonstrates large disagreements between providers.3 The correlation among rating providers is lowest for governance scores and highest for environmental scores. In research, examples of individual ratings can be found which diverge fundamentally, such that one provider rates a firm in the bottom 5% of their universe while the other one ranks the firm among the top-third in a specific category. The importance for investors to consume ESG ratings with caution should thus be highlighted and researchers recommend studying the methodologies of the individual providers carefully in order to select rating providers whose rating is most closely aligned with the investor’s view. 4

At SEIF, we support the integration of ESG criteria into the investment process. We however go one step further by taking a forward-looking approach and offer an impact rating which goes beyond the ESG score of any company. We look at the impact generated by listed firms and believe that most impact can be achieved with listed equities by investing in companies that have the potential to positively contribute in the long-term. 

Even though impact investing is the sustainable investment approach growing the fastest, its investment volumes are still far behind ESG.1 SEIF’s ambition is to accelerate impact-driven investment volumes by also offering an impact rating for listed equities that supports asset managers in their selection process.

If our approach is of interest to you, do not hesitate to reach out to us anytime!

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1Swiss Sustainable Finance, 2021, Swiss Sustainable Investment Market Study 2021.

2Zadeh & Serafeim, 2018, Why and How Investors Use ESG Information: Evidence from a Global Survey. Financial Analysts Journal, 2018, Volume 74 Issue 3, pp. 87-103.

3Gibson, Krueger, Riand & Schmidt, 2019, ESG Rating Disagreement and Stock Returns. Swiss Finance Institute Research Paper No. 19-67.

4Li & Polychronopoulos, 2020, What a Difference an ESG Ratings Provider Makes!