ESG beliefs are investment beliefs. But ESG has changed a lot in the past few years. There’s greater recognition of its importance, more awareness of the wide range of issues it covers, more choices to be made in how to approach it, more possibilities, more scrutiny. So there’s often less consensus within investment firms about ESG beliefs, and they are generally less well-established and less ingrained in the everyday workings of the organization than other investment beliefs.

A beliefs exercise can help to fix that.

Well crafted beliefs capture the collective view of the firm’s professionals and create internal alignment; the beliefs should be known, accepted and applied across the organization.

The first thing that a beliefs exercise needs to consider is purpose: how big a component of the investment process should ESG considerations be? Will non-financial objectives be pursued if that can be done without compromising financial goals? Or are we even willing to give up financial return in pursuit of social or environmental impact?

A beliefs exercise also considers materiality. Unlike many financial factors, the application of ESG considerations tends to vary a lot across different geographies, different asset classes and different sectors. So even where an ESG factor is identified as material, we need to specify what securities it is material for. We need to ask too, in what way it is material. What is the nature of the risk involved? How well understood is it? What time horizon applies? What are the trends?

And the exercise must consider, too, applicability. The implications are different for a passive investment process than for an active process. Different for a quant approach than a fundamental approach. Top-down, bottom-up, factor-based, activist, thematic: whatever the process, ESG integration means finding a fit.

The way we approach a beliefs exercise is based on a four-step process.

• Step one: pre-work. We poll key individuals across the firm, using a questionnaire that can be customized as needed. Gathering this baseline information in advance means that subsequent discussions are more focused and productive
• Step two: discussion. Bring people together to drill down into the issues and to formulate a shared collective position. This should be broad enough to cover the issues, yet specific enough to meaningfully shape decisions.
• Step three: capture. These beliefs provide a common starting point for actions taken across the firm: investment decisions, operations, communications and client engagement. Because the ESG landscape is complex and evolving, the beliefs should not be seen as final or perfect, but rather as living and dynamic.
• Step four: put it into practice. For the investment team, the beliefs must be fleshed out and embedded into the decision-making process and stewardship activity. For the client, sales and marcomms teams, they are the foundation for articulating the firm’s approach, and engaging with clients, prospects and the market.

ESG continues to become ever more mainstream, ever more integral to the investment processes of asset management firms everywhere. Capturing your organization’s beliefs is a key first step toward effective ESG integration.