Every company today must allocate resources to ESG and even provide reports to show its effort in sustainable investing. The SEC provides the framework and regulations to protect investors without putting a gag on ESG innovations.
Some of the most recent regulations to classify and categorize ESG investing strategies include ESG-Integrated, ESG-Focused, and ESG-Impact. To fully implement and observe the set regulations, every business should understand the 3 ESG categories and how they work.
Below is a breakdown of the definition of ESG integration, ESG-Focused, and ESG-Impact.
The ESG frameworks are meant to reduce the bad and increase the good that investors do. The ESG-impact funds are some of the rules proposed by the SEC. The main goal of impact funds is to manage portfolio investments that focus on measurable and specific ESG outcomes.
One of the criteria considered in ESG impact is that each stated goal must achieve a particular ESG impact, contrary to the definition of ESG integration. For example, a fund with a goal like funding the construction of affordable housing units would be a valid ESG impact fund.
Other examples would be a fund that seeks to invest in industrial water treatment and other conservation companies to increase the availability of clean water. The requirements for impact funds are the same as focused funds.
However, the impact fund requirements include a progress measurement for the stated impact, how the financial returns and the intended impact relate, and the timestamp for the progress. Basically, the investors should know the priority of the fund through disclosures.
These ones are where ESG factors are considered significant when engaging with portfolio companies. This fund differs from the definition of ESG integration in that ESG integrated fund does not consider ESG factors in most investing decisions. The weight that ESG factors are given in the ESG-focused funds is not the same as in ESG integrated.
Due to the priority given to ESG factors in the focused fund, institutions engaged in this investing should provide a layered framework disclosing how it implements the ESG factors in the annual reports and brochures. For example, an ESG-focused fund should disclose its carbon footprint in the annual report.
With integrated funds, there is more than one category of factors to consider for investment decisions. While ESG factors are important, these funds also consider other factors related to the business and not necessarily ESG.
For example, according to the definition of ESG integration funds, the fund can prioritize principles or returns instead of sustainability. However, the new rule changes by the SEC require that any fund that markets itself as ESG should provide enough information to prove that to investors in its disclosure. Even though ESG is not a significant factor in integrated funds, there should be a few lines on the ESG factors it considers.
The definition of ESG integration and all the other funds by the SEC includes fully disclosing how these funds will achieve the stated ESG goals. That should be in annual reports and brochures to keep investors aware of what they are investing in and whether the investments align with their goals.