A new concept in the world of investments

 In Impact Investment

Article 1 of “ESG factors and Impact Investing” series

Since the 1990s, a new concept has arisen in investors’ analyses and diligences, leaded by countries such as the United Kingdom, the Netherlands, Canada and Australia, and consolidates specially in the 2010’s. What was previously known in the market as Responsible Investment or Sustainable Investment, was later named by CFA Institute[i] as an ESG Factor (Environmental, Social and Governance).

This recent concept is still at uniformization process. However, as the name indicates, it includes the careful analyses of the relevant variables existing in environmental, social and government factors, listed below:

Table 1: Environmental, Social and Governance factors

Source: ESG Issues in Investing: A guide to investment professionals. CF Institute (2015).

ESG factors can be applied to different types of investment, such as company shares, fixed-income securities, real estate and private equity. Its uses can yield not only a more conscious and responsible investment, but also reduce the risks associated with these investments and, potentially, amplify its long-term return profile, according to the recent academic conclusions. Therefore, considering the long-term focus of managing Family Offices’ portfolios and its concern with perpetuity, this can be a useful daily tool.

ESG can be applied in different forms. According to CFA Institute, there are six basic strategies:

  1. Investment by exclusion is the oldest technique, with religious roots. It involves excluding certain investments and sectors based on moral values, like companies that disrespect human rights. This has been quickly losing ground to more sophisticated techniques.
  2. Thematic investments are investments that follow a specific theme, like a fund that only invests in clean energy or sustainable reforestation. It is not an exclusively ESG technique.
  3. Active Ownership is the action of actively promoting the best ESG practices in invested companies in a portfolio.
  4. Impact Investing is the investment in companies and assets whose explicit goals are to create economic value as well as a positive social and/or environmental impact. Such impact must be measured, and the application needs to generate financial return to the investor.
  5. Best-In-Cass is the strategy that involves the preference for investing in the best ESG variables, or the preference for an asset that has been improving its ESG performance.
  6. Finally, the fastest growing type of investment in absolute terms is the integration of ESG factors to the portfolio management analysis. Just as governance is already relevant on investment discussions, integrated to analysis and diligences, both Social and Environmental factors are also being introduced.

Graph 1: Most frequent ESG techniques used by investors

Source: ESG Issues in Investing: A guide to investment professionals. CF Institute (2015).

In the words of Ban-Ki Moon, former UN Secretary General, “a rising number of institutional investors […] are incorporating ESG factors into their investment decision-making and ownership practices in order to reduce risk, enhance financial returns and meet the expectations of their beneficiaries and clients”[ii]

According to the Principles for Responsible Investment (PRI), a union of managers that incorporate ESG factors in their investments, the total AUM of its members has grown from less than US$ 10 tn in 2006 to over US$ 60 tn in 2016. For comparison, according to Deutsche Bank, the total of financial assets in the world is less than US$ 300 tn.

Graph 2: Total of AUM of PRI participants

Source: ESG Issues in Investing: A guide to investment professionals. CF Institute (2015).

The concept of ESG factors is heading towards a prominent position in the financial market, not only by its application in investments analysis, but also for how fast it is being adopted and for the financial amount under management that is increasingly using such factors.

On the investor side, it is perceived that the new family generations, by getting closer to the investment world, naturally come up with this subject even if they are not familiar with the concept of ESG. In this sense, it’s fundamental for Investor Families to understand and gradually adopt them. Therefore, this is not about “if” they’ll be incorporated, but “when”.




Graduated in Economics at PUC-Rio and certified as Chartered Financial Analyst (CFA). After years of working in the financial market, he is now manager of the Financial Planning team at Stone Pagamentos.


Partner at INEO and co-author of The Investor Family and the Family Office.

[i] Respected International congregation of Investment professionals.

[ii] Principles for Responsible Investment. 2016.

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