ESG Investment Styles. There are lots of different investment styles when it comes to ESG investing, and that leads to a lot of terminology which can be confusing, as we've shown on this slide here. Now, one way to think about this is in terms of the investor's priorities and also the approach that they use to help us understand the investment styles better. And that's what this chart does here. On the horizontal axis, we have values versus value, and that's about determining what the primary focus is of the investor. Is it about doing good for society and the environment which is values, or is it about generating better returns for the portfolio, and that's value. Although these two aren't necessarily mutually exclusive, typically investors will prioritize one or the other. Now, on the vertical axis, we have top-down versus bottom-up. And this is about determining what the starting point is in the analysis. Does it start with a particular theme or risk and use this to drive investment decisions about which sectors and companies to include or exclude, and that's top-down. Or does it start with a list of stocks that could potentially be included in the portfolio, and these stocks then assessed against certain criteria to drive investment decisions, and that's bottom-up. ESG integration, which is on the right-hand side, is about integrating ESG risks into the investment decision. And this is very much a value-driven approach, as in theory, an investor will be prepared to invest in the company, regardless of the nature of the issues or risks facing the company, as long as the valuation case is there. Now screening, which is on the left-hand side and which includes ethical screening and norms-based screening, is about including or excluding companies from the list of all investible companies based on certain characteristics. Screening generally prioritizes the values of the investor rather than value generation, as it includes or excludes companies from the portfolio purely on the basis of these characteristics rather than the valuation of the company. Ethical screening is about excluding companies that engage in certain types of activities, which are typically considered to have more negative impacts on society, such as the protection of weapons, or they're considered to be more damaging to the environment, such as producing high levels of hazardous waste. Norms-based screening, which is similar, means excluding companies which don't comply with certain minimum standards or business norms. And this can include breaches of UN principles or international labor organization standards. Now, best in class investing on the bottom right is about positive selection of companies which perform well on ESG metrics relative to their industry peers. Now, an advantage of this approach is that it avoids the need to exclude certain sectors from the portfolio, and therefore reduces the risk of underperformance through lack of exposure to a certain sector. Thematic investing, which is at the top, is about determining certain themes which are priority for the investor, such as climate change, and identifying which sectors or types of business are most exposed to or benefit most from this theme. This is then used to drive stock selection. Impact investing on the bottom left is about investing in companies which are likely to generate a benefit for society. Typically, these are companies which provide new technologies or processes which help to solve a societal or environmental problem. Because the primary focuses here is benefiting society and because the process starts with the company rather than a particular theme, this sits on the bottom left. Now, this chart shows which approaches are most popular in different regions. And it's clear that exclusion screening is most popular. This is partly because it's the simplest and also the lowest cost way of incorporating some ESG criteria into the decision-making process. However, ESG integration is also very popular, particularly in the US. It's also worth noting there's another investment style mentioned here that we haven't looked at before, and that's corporate engagement and shareholder action. And this is about investors using their position as stakeholders in the company to influence and improve how companies operate in respect of ESG risks.
