When Income Meets ESG

So before we dive into your paper, maybe let's just start with some high-level definitions.

Pretty much any fund manager you talk to will tell you that they care about sustainability.

So Ronald, how do you define which strategies have enough of a focus on ESG to really count as ESG funds?

That is indeed an important question.

Almost every fund manager looks at ESG issues nowadays, but we only count the fund as an ESG fund when it explicitly is built into the strategy.

And that means ESG isn't just something the manager considers.

It's a formal part of the fund's objectives or investment process.

and can directly influence which companies the fund owns or avoids.

And to make that distinction, we have relied on the official fund documents where explicit references should be made that ESG criteria play a binding role in stock selection or explicit sustainability targets need to be met.

So if we had a strategy that systematically excludes any companies involved in coal mining or coal-based power generation, would that be considered an ESG strategy?

No, not necessarily.

Excluding thermal coal is a common practice among many funds.

And we kind of see it as a minimum requirement.

So if a fund excludes only thermal coal, but can still invest in other polluting industries or so-called sin stocks, such as alcohol and gambling, we would not classify it as an ESG strategy.

So before we dive into your paper, maybe let's just start with some high-level definitions.

Pretty much any fund manager you talk to will tell you that they care about sustainability.

So Ronald, how do you define which strategies have enough of a focus on ESG to really count as ESG funds?

That is indeed an important question.

Almost every fund manager looks at ESG issues nowadays, but we only count the fund as an ESG fund when it explicitly is built into the strategy.

And that means ESG isn't just something the manager considers.

It's a formal part of the fund's objectives or investment process.

and can directly influence which companies the fund owns or avoids.

And to make that distinction, we have relied on the official fund documents where explicit references should be made that ESG criteria play a binding role in stock selection or explicit sustainability targets need to be met.

So if we had a strategy that systematically excludes any companies involved in coal mining or coal-based power generation, would that be considered an ESG strategy?

No, not necessarily.

Excluding thermal coal is a common practice among many funds.

And we kind of see it as a minimum requirement.

So if a fund excludes only thermal coal, but can still invest in other polluting industries or so-called sin stocks, such as alcohol and gambling, we would not classify it as an ESG strategy.