Approaches to ESG portfolio construction. Portfolio management approaches fall into two broad categories: active and passive. The passive approaches are most commonly associated with indexing or benchmark replication. Active investing is where the usual objective is to beat a benchmark or achieve absolute returns, often on a risk-adjusted basis, and can be approached in two ways, either using a discretionary strategy or a systematic strategy. These approaches may reflect a variety of ideas and profitable investment opportunities. Discretionary or fundamental strategies are the most typical and best established, and they're based on research into companies, sectors, or markets and involve the application of analyst discretion and judgment. These strategies may have various starting points. For example, one may start at the macro level or one may start analysis at the stock level. Along with insights into a company's business model, management team, product lines, and economic outlook, this analysis provides a view on the company's future business prospects and includes evaluation of its shares. Analysis of ESG data helps analysts form their opinions on the ability of the firm to manage ESG risks and opportunities. Systematic or quantitative strategies, on the other hand, involve analyst judgment at the design stage but they largely replace the ongoing reliance on human judgment and discretion with systematic processes. Those systematic processes are based on statistical analysis and are often dependent on computer programming for execution. These systematic processes search for security and market characteristics and patterns that have predictive power in order to identify securities or trades that will earn superior investment returns. ESG data is typically aggregated into an ESG factor, an ESG score, which is then added to the quantitative models. This could be a screen that creates the investment universe or a quantitative model used to adjust valuations based on several factors, including ESG. There are many hybrid approaches that use a combination of the methods and techniques discussed here.