How Investors
Integrate ESG:
A Typology
of Approaches 
April 2017

e ESG: A Typology of Approaches                                                                                                     April 2017                         
  
 
    2 
© 2017. The Investor Responsibility Research Center Institute (IRRC Institute or 
IRRCi). The materials in this report may be reproduced and distributed without 
advance permission, but only if attributed. If reproduced substantially or entirely, it 
should include all copyright and trademark notices. 
Authors: 
Martin Vezér 
Associate Analyst, Thematic Research 
martin.vezer@sustainalytics.com 
 
Trevor David 
Senior Advisor, Advisory Services 
trevor.david@sustainalytics.com 
Kevin Ranney 
Director, Product Strategy and Development 
kevin.ranney@sustainalytics.com 
 
Doug Morrow 
Associate Director, Thematic Research 
doug.morrow@sustainalytics.com 
 
Acknowledgements  
The authors wish to thank the following people for helpful discussions and reviews of 
drafts of this report: Cecilia Barsk, Andrew Bourdeau, Marcel Leistenschneider, Jon 
Lukomnik, Mary Jane McQuillen, Diederik Timmer and Shila Wattamwar. The authors 
would also like to thank all the interview participants (see Appendix A). 
 
 
 
 
How Investors Integrate ESG: A Typology of Approaches

e ESG: A Typology of Approaches                                                                                                     April 2017                         
  
 
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About IRRCi 
The Investor Responsibility Research Center Institute is a not-for-profit organization 
headquartered in New York, NY, that provides thought leadership at the intersection 
of corporate responsibility and the informational needs of investors. More 
information is available at www.irrcinstitute.org  
About Sustainalytics 
Sustainalytics is an independent ESG and corporate governance research, ratings and 
analysis firm supporting investors around the world with the development and 
implementation of responsible investment strategies. With 13 offices globally, 
Sustainalytics partners with institutional investors who integrate environmental, 
social and governance information and assessments into their investment processes. 
Today, the firm has more than 330 staff members, including 170 analysts with varied 
multidisciplinary expertise of more than 40 sectors. Through the IRRI survey, investors 
selected Sustainalytics as the best independent responsible investment research firm 
for three consecutive years, 2012 through 2014, and in 2015 Sustainalytics was named 
among the top three firms for both ESG and Corporate Governance research. For more 
information, visit www.sustainalytics.com. 
Sustainalytics observes the greatest possible care in using information but cannot guarantee that information contained 
herein is accurate and/or complete and no rights can be derived from it. The information is provided “as is” and, therefore 
Sustainalytics assumes no responsibility for errors or omissions. Sustainalytics nor its suppliers accept any liability for 
damage arising from the use of this publication/report or information contained herein in any manner whatsoever.  
Sustainalytics 
info@sustainalytics.com 
www.sustainalytics.com 
 
How Investors Integrate ESG: A Typology of Approaches

e ESG: A Typology of Approaches                                                                                                     April 2017                         
  
 
    4 
Contents 
About IRRCi 
3 
About Sustainalytics 
3 
Executive Summary 
5 
Introduction 
7 
The rise of ESG integration 
7 
Towards a typology of ESG integration 
7 
Methodology 
10 
A Typology of ESG Integration 
11 
Core dimensions and key differentiators 
11 
Dimension 1: Management 
12 
Dimension 2: Research 
17 
Dimension 3: Application 
21 
Prevailing types 
25 
The Believer 
26 
The Cautionary 
27 
The Statistician 
28 
The Discretionary 
29 
The Transition-Focused 
30 
The Fundamentalist 
31 
Market observations 
32 
The extent of integration 
32 
Challenges of meaningful ESG integration 
32 
Improving ESG research 
33 
Lifting constraints on ESG innovation 
33 
The relationship between materiality and impact 
33 
Conclusion 
34 
Reviewing key contributions 
34 
Looking ahead 
34 
Endnotes 
35 
Appendix A: Investors 
36 
Interviewed investors 
36 
Non-interviewed investors 
37 
Appendix B: Initial Framework 
38 
 
 
How Investors Integrate ESG: A Typology of Approaches

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    5 
 
 
Executive Summary 
 
Key insights 
▪ 
This report develops a new typology for classifying the approaches that 
institutional investors take to integrate environmental, social and governance 
(ESG) factors into their investment process.  
▪ 
The typology is based on an analysis of the investment practices of 70 institutional 
investors with total assets under management of USD 19.9tn.  
▪ 
Approaches to ESG integration are classified along three dimensions: management 
(who is integrating ESG), research (what is being integrated), and application (how 
the integration is taking place). 
▪ 
Within each dimension, we identify two key differentiators that capture the 
essential features of ESG integration practices. 
▪ 
The typology is used to describe six prevailing types of ESG integration: 1) the 
Believer, 2) the Cautionary, 3) the Statistician, 4) the Discretionary, 5) the 
Transition-Focused, and 6) the Fundamentalist. 
▪ 
The report concludes by offering five high-level observations about the general 
state of ESG integration, focusing on industry challenges and opportunities. 
 
Classifying approaches to ESG integration 
 
Understanding how investors are applying the growing supply of corporate ESG 
information into their investment decision-making is an increasingly important 
exercise. While several recent publications have contributed to this research, the 
market to date has lacked an analytical framework to organize the full diversity of 
integration techniques. This report aims to help investors navigate the rapidly changing 
responsible investing landscape by developing a typology that classifies approaches to 
ESG integration. An overview of the typology is provided below.  
Dimension 1: Management 
Dimension 2: Research 
Dimension 3: Application 
 
 
Source: Sustainalytics, IRRCi 
 
 
Process to 
ensure 
integration
Decentralized 
ESG 
management
1
2
3
4
No process 
to ensure 
integration
Centralized 
ESG 
management
1
2
3
4
Modified
ESG inputs
Narrow 
ESG 
research
Unmodified
ESG inputs
Broad 
ESG 
research
1
2
3
4
More top-
down ESG 
techniques
Less bottom-
up ESG 
techniques
1
2
3
4
Less top-
down ESG 
techniques
More bottom-
up ESG 
techniques

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Determining prevailing types 
 
Prevailing types of ESG integration were determined based on a number of factors, 
including observed frequency amongst the dataset of 70 institutional investors and the 
distinctiveness of the approach. An overview of the six prevailing types and their 
relationship to the typology is provided below.  
Overview of the six prevailing types of ESG integration 
 
Source: Sustainalytics, IRRCi 
 
 
 
 
●Decentralized
●Process to ensure 
integration
●Broad
●Modified inputs
●More top-down
●More bottom-up
The Transition-Focused
●Less top-down
●More bottom-up
The Fundamentalist
●Centralized
●Process to ensure 
integration
●Narrow 
●Unmodified inputs 
●More top-down
●Less bottom-up
The Believer
●Less top-down
●More bottom-up
The Cautionary
●Narrow 
●Modified inputs
●More top-down
●Less bottom-up
The Statistician
Application
Research
●Centralized
●No process to ensure 
integration
●Narrow
●Unmodified inputs
●Less top-down
●Less bottom-up
The Discretionary
Prevailing types
Management

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Introduction 
 
The rise of ESG integration  
ESG AUM are on the rise 
Recent years have seen a surge of investor interest in integrating environmental, social 
and governance (ESG) information into financial analysis and investment decision-
making. Signs of this trend include continued growth in the volume of managed assets 
that incorporate ESG research, increasingly sophisticated investor tools, more ESG 
information providers, more ESG information gathering frameworks, more indices 
incorporating ESG data, and the use of ESG factors across asset classes, including fixed 
income and alternatives. According to data collected by the Global Sustainable 
Investment Alliance, ESG investment strategies, broadly defined, currently account for 
USD 22.9tn in managed assets worldwide, up from USD 13.3tn in 2012.1  
 
Global ESG assets under management 
 
Source: Sustainalytics, IRRCi, GSIA2 
 
Towards a typology of ESG integration 
Classifying approaches to ESG integration 
The investment community’s growing use of ESG information has 1) raised the 
importance of understanding how investors are addressing ESG factors in their 
investment processes and 2) created the need for an overarching framework to 
organize the increasingly diverse approaches to ESG integration that are being deployed 
in the market. 
The PRI has published several reports 
exploring integration strategies 
The United Nations-supported Principles for Responsible Investment (PRI) has made 
important contributions to these objectives. In 2016, the PRI published a report that 
detailed a wide range of ESG integration methods used by public equity investors across 
four investment strategies.3  That report built on an earlier PRI study that introduced a 
framework for analysing ESG factors in fundamental equity analysis.4  
6
8
10
12
14
16
18
20
22
24
2012
2014
2016
USD tn

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Identifying the essential attributes 
While these and other studies provide an inventory of ESG integration techniques, the 
aim of this report is to create a framework that stakeholders can use to classify 
approaches to ESG integration. The typology that we develop in this report centres on 
the most essential characteristics of ESG integration and aims to describe and explain, 
rather than to prescribe or evaluate, different approach types. 
 
Typology 
Characteristics organized under three 
broad headings 
The typology is organized around three dimensions of ESG integration: management, 
research and application. Each dimension features two key differentiators that capture, 
at a detailed level, the critical elements of different approaches to ESG integration.  
1) Management (who is integrating ESG) 
a) Degree of centralization of ESG functions 
b) Process to ensure ESG integration 
2) Research (what is being integrated) 
a) Scope of research 
b) The degree of modification of ESG inputs 
3) Application (how the integration is taking place) 
a) Top-down techniques5 
b) Bottom-up techniques 
The three dimensions and six differentiators are described in detail below. 
 
Prevailing types   
Six distinctive approaches to ESG 
integration 
Another contribution of this study is the identification of six prevailing types of ESG 
integration. While the typology yields a theoretical maximum of 64 approach types, not 
all of these approach types were reflected in our dataset of 70 investors.6 Within the 
subset of observed approaches we characterize the six most distinctive types of ESG 
integration, ranging from The Believer to The Fundamentalist.  
 
Creating value for stakeholders 
Benefits for target audiences  
One of the signposts of investors’ growing interest in, and use of, ESG information is the 
increasing complexity and sophistication of ESG integration tools. It is hoped that, by 
identifying the fundamental characteristics within three different aspects of integration 
strategies (management, research and application), this typology will help decision-
makers in the investment industry, especially those new to ESG, to navigate the 
increasingly dynamic field of responsible investing. 
For asset managers, particularly those looking to create a new integration strategy, this 
study highlights important components of ESG integration that merit careful review. 
For asset owners, this report helps characterize the overall state of play of ESG 
integration and may serve as a useful resource to assess the ESG capabilities of 
managers. For retail investors, this report may act as an informational guide that can 
be used in the selection process for investment advisors or products.

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    9 
 
 
Target audiences and the study’s key benefits 
 
Source: Sustainalytics, IRRCi 
 
Defining ESG integration 
An investment perspective 
 
 
The term “ESG integration” generally is understood as the incorporation of 
environmental, social and governance factors into financial analysis and decision-
making for the purposes of enhancing investment performance. The typology that we 
develop in this report adopts this definition of ESG integration. 
Screening can be considered an approach 
to ESG integration 
It should be noted that ESG-based screening, a technique employed by many investors, 
is classified as ESG integration only if carried out based on an investment case, rather 
than for the purposes of values alignment or reputational risk management (for the 
asset owner or asset manager). 
 
Scope and limitations 
Activities linked to integration 
For many investment managers and asset owners, the term “integration” includes a 
number of functions that support ESG integration. Most notable among these are active 
ownership activities, including engagement and proxy voting. While active ownership 
often plays an important role in informing investment analysis, this report concentrates 
on the structures, processes and methods involved in integrating ESG factors into 
portfolio management. 
ESG and strategic asset allocation 
For some investors, ESG integration also includes the consideration of ESG factors in 
other components of investment decision-making, such as strategic asset allocation.7 
While this type of analysis stands out as an innovative application of ESG information, 
our typology focuses on portfolio mechanics and largely excludes such efforts. 
 
While this typology helps to define and compare different approaches to ESG 
integration, it does not capture the full complexity of approaches in the market. 
 
A cross-section of the market 
The typology is based on an analysis  
of 70 institutional investors with collective 
AUM of USD 19.9tn 
The typology is informed by an analysis of the practices of 70 institutional investors, 
and includes desk-based research and semi-structured interviews with 35 investor 
representatives (Appendix A). The 70 investors that comprise the final dataset have 
collective assets under management (AUM) of USD 19.9tn. With respect to asset 
classes, the bulk of the investors reviewed for this report specialize in listed equity and, 
to a lesser extent, fixed income. While some of these investors have exposure to other 
asset classes, including hedge funds and private equity, the typology centres on 
approaches to ESG integration within public equity.  
 
 
Stakeholder
Benefit
Asset managers
Identifies the essential characteristics of ESG integration strategies
Asset owners
Supports the assessment of asset managers' ESG capabilities
Retail investors
Informs the selection process for investment advisors or products

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Methodology 
A starting analytical framework 
An initial framework was developed based on a study of the indicators used in PRI 
transparency reporting and the authors’ background knowledge of industry practices. 
This framework was used to structure information collected through desk-based 
research and semi-structured interviews with investors, compiling data under the three 
dimensions of management, research and application. These headings reflect the desire 
to understand the mechanics of ESG integration, including organizational features, such 
as which teams are responsible for integration, as well as the type of research and 
analysis being integrated.  
 
The use of indicators 
Deriving six key differentiators  
The initial framework consisted of 18 indicators, which were used to classify specific 
aspects of ESG integration strategies. Those indicators that contributed most 
substantially to differentiating among approaches to ESG integration ultimately formed 
six key differentiators (see Appendix B). 
 
Summary of project structure
 
Source: Sustainalytics, IRRCi 
 
Desk-based research and investor interviews   
The dataset of 70 investors covers a wide 
range of integration approaches 
Desk-based research was carried out on 70 investors (a mix of investment managers 
and asset owners with internal management) that are signatories to the PRI. Research 
included public information, PRI transparency reports and corporate publications, as 
well as semi-structured interviews with representatives from 35 of the 70 investors. The 
sample was designed to ensure that it included a wide cross-section of the market, 
capturing a diversity of investor size, geography, position in the market, and experience 
with ESG integration.  
An approach to ESG integration as the 
unit of analysis 
The unit of analysis for this study is the approach that individual portfolio management 
teams take to integration. While smaller, focused managers may have only one ESG 
integration approach, some larger investment management firms with different teams 
have multiple approaches.  
 
 
Initial 
framework 
Six prevailing 
types
Typology
Desk-based
research and 
investor 
interviews

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
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A Typology of ESG Integration 
 
Core dimensions and key differentiators   
 
This chapter introduces a typology of approaches to ESG integration. The typology 
consists of three dimensions, each containing two differentiators.  
An overview of the typology 
The table below summarizes the structure of the typology. For the management 
dimension, which looks at who is responsible for ESG integration, the key differentiators 
are the degree to which a firm centralizes ESG responsibilities and implements 
processes to ensure integration. For the research dimension, which considers what is 
integrated, the key differentiators are the scope of ESG research and the degree to 
which an investor modifies ESG inputs. Finally, the application dimension is concerned 
with how the integration takes place. The key differentiators under this dimension are 
the extent to which a team applies top-down and/or bottom-up ESG integration 
techniques. 
A typology of ESG integration 
 
Source: Sustainalytics, IRRCi 
 
Matrix analysis 
Mapping approaches 
In order to compare approaches to ESG integration, the two differentiators for each 
dimension are presented in a matrix format. This mapping creates four quadrants into 
which integration approaches may fall. 
 
 
Core dimension
Summary
Shorthand
Key differentiators
Management
A focus on how different functions, ESG-relevant roles and 
responsibilities are structured within an organization. 
Who is integrating 
ESG?
a) Degree of centralization of ESG functions 
b) Process to ensure ESG integration 
Research
A focus on which types of ESG information and analysis are 
integrated into the investment process.
What is being 
integrated?
a) Scope of research
b) Modification of ESG inputs
Application
A focus on how and at what point ESG information and analysis 
are integrated into the investment process.
How is integration is 
taking place?
a) Top-down techniques
b) Bottom-up techniques

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Dimension 1: Management  
The who of integration    
The management dimension of ESG integration focuses on how ESG-related functions, 
roles and responsibilities are structured and managed. It is the who of ESG integration.  
Within this dimension, the two key differentiators for distinguishing approaches to ESG 
integration are:  
a) the degree to which functions and responsibilities related to ESG integration 
are centralized in an organization, and 
b) the extent to which a firm or investment team has processes in place to 
ensure integration. 
As shown in the matrix below, a given approach to ESG integration can fall into one of 
four quadrants based on how responsibilities are distributed within an organization 
and the use of processes to ensure integration.  
 
Matrix analysis of the management dimension 
 
Source: Sustainalytics, IRRCi 
 
a) Degree of centralization 
A focus on ESG decision-makers 
The degree to which an approach to ESG integration is centralized depends on how 
ESG functions and responsibilities are distributed within an organization. Centralized 
approaches involve organizational initiatives and processes carried out by dedicated 
ESG personnel or teams, whereas in decentralized approaches portfolio managers 
(PMs) and analysts in portfolio management teams are responsible for carrying out 
ESG-related functions. Two important attributes of this key differentiator are the 
structure and role of staff. 
 
 
Process to 
ensure 
integration
Decentralized 
ESG 
management
1
2
3
4
No process 
to ensure 
integration
Centralized 
ESG 
management
1
2
3
4

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Organizational structure  
ESG roles and responsibilities 
 
 
 
To understand the structure and role of ESG staff within an organization, our analysis 
considered whether a firm employs ESG specialists and, if so, whether they are 
embedded in an investment team or operate independently. This differentiator 
organizes the substantial variation in structures and practices along a continuum from 
fully centralized to fully decentralized. 
In a centralized structure, responsibility 
for ESG analysis sits with ESG staff 
In a fully centralized structure, ESG-related functions and responsibilities (such as 
carrying out materiality analysis and research at the company, industry, or macro 
levels) are performed by designated ESG staff separate from the investment teams. 
They produce analysis that is delivered to PMs, and collaborate with PMs when ESG 
issues arise. In a less (but still) centralized approach, ESG specialists may be situated 
within an investment team and work directly with PMs on ESG-related analysis, 
including the development of a team view (consensus position) on ESG issues.  
In a decentralized structure, responsibility 
for ESG analysis sits with investment 
teams 
In a fully decentralized structure, the responsibility for carrying out any ESG research 
and analysis lies with individual analysts and PMs. In such a structure, investment staff 
are responsible for carrying out ESG research, including, for instance, materiality or 
trend analysis on specific sectors or themes. In some cases, particular individuals within 
the investment team take on the role of ESG champions and disseminate research and 
examples of ESG analysis to the broader investment team. 
 
The table below summarizes some examples of centralized and decentralized 
approaches to managing ESG functions of an organization.  
Differentiating ESG management by degree of centralization
 
 Source: Sustainalytics, IRRCi 
 b) Processes to ensure ESG integration 
Ensuring the consideration of ESG factors 
The second key differentiator of the management dimension focuses on whether 
processes are in place to ensure that ESG factors are integrated into investment 
decision-making in a systematic fashion.  
 
 
Key differentiator
Example
Description
Independent ESG specialists
ESG specialists operate independently of investment teams and PMs.
Embedded ESG specialists
ESG specialists are embedded in the investment team.
Unified ESG materiality analysis
ESG team conducts materiality analysis for informing investment decisions.
Absence of designated ESG role
PMs may conduct ESG analysis as part of their investment process. 
ESG compartmentalization
ESG teams focus on other elements of ESG strategies, such as active ownership activities.
PMs as ESG leads
PMs have formal responsibility for ESG integration and research.
Centralized ESG 
management structure
Decentralized ESG 
management structure

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A closer look at oversight processes  
Mandatory reporting is a common tool to 
ensure ESG integration 
 
 
 
Processes to ensure ESG integration come in several forms. Such mechanisms 
commonly involve establishing protocols that require documentation of how ESG 
factors were considered during the investment process. While mandatory ESG 
reporting may apply to all investment decisions, some firms choose to apply a more 
focused approach to particular industries, or to companies that fail to meet specified 
ESG risk thresholds. 
Structured internal dialogue helps to 
ensure that ESG factors are considered 
 
Some approaches also include structured processes to facilitate the discussion of ESG 
issues within an investment team or among ESG specialists. An investment team may, 
for example, include the discussion of ESG risks, opportunities and emerging themes 
as a regular agenda item for team meetings. Mandatory discussions with ESG 
specialists may also be triggered if an investment fails to meet predetermined ESG 
thresholds, such as a minimum percentile ranking within an industry.  
Internal committees review and discuss 
investments outside ESG-defined universe 
 
In some cases, a process is established whereby approval from an internal 
sustainability committee is required for all investments made outside an investable 
universe that has been refined based on ESG factors (among others). In such instances, 
PMs who wish to invest in securities outside this universe must present their case to 
the committee and demonstrate that ESG risks have been appropriately considered.   
Culture can be a critical means to ensure 
ESG integration 
Some firms have an explicit sustainability focus and a culture that emphasizes the 
importance of considering ESG inputs. Consistent messaging from senior staff and a 
clear sense that ESG integration is core to the firm’s overall value proposition are 
widely viewed as necessary to build such a culture.   
Encouraging vs ensuring 
Other approaches encourage ESG integration, but stop short of ensuring integration. 
In these cases, ESG resources, including research and training, may be available, but 
PMs and analysts have discretion about how to apply this information. Such 
approaches do not typically require that investment teams document whether or how 
ESG factors influence investment decision-making.  
The table below provides examples of approaches that have processes in place to 
ensure ESG integration and some that do not. 
Differentiating ESG management by process to ensure integration
 
Source: Sustainalytics, IRRCi 
 
 
Key differentiator
Example
Description
ESG threshold trigger
An investment falling below a minimum ESG threshold triggers discussion.
Explicit ESG priorities
Firm leadership identifies ESG factors as critical inputs for teams to consider.
ESG reporting 
Documenting the role of ESG factors in investment decision-making process is required.  
Designated ESG inputs 
ESG information required in reports and agendas for regular team meetings.    
Optional ESG analysis
ESG integration is optional or implicit in the consideration of overall financial factors.
Unreported ESG factors
No required ESG reporting.
Process to ensure ESG 
integration
No process to ensure ESG 
integration

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    15 
 
 
Observations and analysis 
 
The role of team culture 
Culture plays an important role 
An investment firm’s corporate culture plays a significant role in determining the way 
in which ESG responsibilities are structured. Some investment teams, especially those 
working in sustainability-focused 
firms, 
have 
embedded 
ESG 
integration into their culture and 
the 
expectations 
of 
portfolio 
managers. These teams typically 
share the belief that ESG inputs are 
important to consider and often 
integrate ESG information in their 
financial 
analysis 
without 
centralized management functions 
influencing 
their 
integration 
process. Support from C-level executives is widely regarded as critical for building a 
strong culture of ESG integration. 
 
Strong views on benefits and drawbacks of centralization 
Advantages of different management 
approaches depend on the context of 
investment teams 
Many interviewees expressed strong opinions about the advantages and 
disadvantages of both centralized and decentralized structures. Those with a more 
centralized approach often thought of centralization as an important way of motivating 
ESG integration and emphasized the 
subject matter expertise of ESG 
specialists, while those taking a 
decentralized 
approach 
typically 
stressed the (investment) decision-
making 
authority 
of 
PMs 
and 
analysts. Some proponents of decentralized approaches maintain that overly rigid 
centralized structures may create resistance among investment teams, particularly if 
ESG integration processes are viewed as overly prescriptive. 
 
The challenge of blending investment and ESG knowledge 
Scarcity of ESG and investment 
knowledge?    
Some interviewees also noted concerns about the difficulty of finding investment 
professionals with knowledge of 
both ESG and finance. This issue 
can present challenges when ESG 
personnel are unable to focus on 
material factors due to a lack of 
financial knowledge, or when 
investment professionals overlook 
relevant ESG issues due to a lack of 
ESG education. A lack of multidisciplinary expertise can lead to sub-optimal investment 
decision-making in centralized structures, where the onus for ESG integration rests 
with ESG staff, and decentralized structures where PMs and analysts lead ESG efforts. 
“It’s hard to find people who have come to 
this business with a commitment to ending 
poverty and deforestation, and who also are 
lovers of analysing capex.” 
 – Neil Brown, Fund Manager, Alliance Trust 
“You have to pick your battles, and 
sometimes that battle is with a PM.”  
– Philip Ripman, Senior Analyst, 
Sustainable Investments, Storebrand  
“If you don’t have the buy-in of the CEO, CIO 
and Head of Research, it’s very hard to carry 
out ESG integration on a firm-wide basis 
over the long term, or to have the internal 
resources allocated to support the integrity 
of the ESG research integration and 
investment process.”  
– Mary Jane McQuillen, Managing Director, 
PM, Head of ESG Investment, Clearbridge

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    16 
 
 
Are reporting mechanisms reassuring? 
Keeping track of integration efforts  
Diverging views about the investment case for ESG integration were cited frequently 
as a barrier to the systematic consideration of ESG factors. Some interviewees 
maintained that stronger mechanisms for ensuring integration should be adopted 
across a firm to facilitate integration and ensure consistent treatment of ESG 
information. Others, however, maintain that such mechanisms are superfluous, 
arguing that fiduciary duty demands the consideration of all material information, 
including material ESG factors. 
The presence or lack of a mechanism to ensure ESG integration was cited by several 
interviewees as having an impact on employee recruitment and retention. Individuals 
with an interest in ESG integration may be drawn to work and stay at firms with 
formalized processes in place. Alternatively, individuals who do not see the merit in 
ESG integration may chose to leave firms that have processes to ensure ESG integration 
are in place.  
Linking ESG performance and variable pay 
Some firms aim to ensure ESG integration by explicitly tying performance assessments 
and variable pay to ESG-specific key performance indicators. Proponents of this 
approach argue that it is helpful to offer investment staff additional incentives to 
provide quality ESG analysis and decision-making. Additionally, advocates of such 
incentives argue that the consideration of ESG factors can not be assumed to be 
captured in the existing process of managers, given that analysts and PMs may not 
have received adequate education and training related to ESG. However, more 
commonly, ESG is considered to 
be implicitly captured as a 
component of other performance 
metrics. For example, this view 
holds that if material ESG factors 
are not considered, more general 
metrics 
such 
as 
quality 
of 
research 
and 
investment 
performance may be negatively 
impacted.  
 
Trends in the market 
A shift in responsibilities from ESG 
specialists to investment teams 
Some firms focused on active fundamental strategies are moving to a more 
decentralized model, shifting responsibilities for ESG analysis from designated ESG 
specialists to portfolio managers. These firms view this transition as an important step 
for increasing portfolio managers’ buy-in of ESG integration, leveraging their 
knowledge of a company’s business model and management, and determining which 
ESG factors are material for a given security. Some maintain that this transition could 
increase the flow of information between ESG specialists and PMs, and may involve 
collaborative training exercises, portfolio monitoring and other joint initiatives. Some 
interviewees explained that designated ESG staff may effectively be working towards 
making their current role of facilitating ESG integration dispensable, as ESG integration 
becomes increasingly embedded in the roles of analysts and PMs. 
“Incentivizing people to make decisions 
based on ESG factors shouldn’t be 
necessary. A good portfolio manager is 
going to take into account all of the things 
he or she thinks are material.”  
– Michelle Edkins, Managing Director, 
Global Head of BlackRock Investment 
Stewardship

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    17 
 
 
Dimension 2: Research 
The what of integration   
The research dimension focuses on the type of ESG information integrated into the 
investment process. Examining integration along this dimension involves describing 
how investment teams conduct ESG research, and the extent to which they modify ESG 
data to inform investment decisions.  
Within this dimension, the two key differentiators for distinguishing approaches to ESG 
integration are:  
a) the scope of the ESG research and analysis used by an investment team, and 
b) the modification of ESG inputs.  
As shown in the matrix below, a given approach to ESG integration can fall into one of 
four quadrants based on the type of ESG research used and the modification of ESG 
inputs.  
 
Matrix analysis of the research dimension 
 
Source: Sustainalytics, IRRCi 
 
a) Scope of research 
Narrow and broad research 
The scope of the ESG research and analysis used by investment managers ranges from 
narrow to broad. Narrow research focuses only on certain ESG-relevant characteristics 
of individual companies and securities, whereas broad research focuses not only on 
issuer-level information but also on ESG-relevant issues and trends at the sector, 
thematic or macro level that may generate risks and opportunities for companies.  
 
 
Modified
ESG inputs
Narrow 
ESG 
research
Unmodified
ESG inputs
Broad 
ESG 
research
1
2
3
4

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    18 
 
 
Narrow ESG research 
Narrow ESG research focuses on 
company-level issues 
Narrow ESG research focuses on the ESG-relevant characteristics of individual 
companies and may include a wide range of performance metrics, such as those that 
assess governance practices, health and safety programmes, water intensity or 
involvement in controversial events. A narrow research focus may reflect the view that 
ESG analysis is best utilized to provide insights into idiosyncratic risks and opportunities 
at the company level.  
 
Broad ESG research 
Broad ESG research focuses on issuer, 
macro and thematic-level ESG issues 
Broad ESG research typically includes – but also goes beyond – considering company-
level information to investigate potential ESG risks and opportunities associated with 
macro or thematic perspectives. Examples of this type of research approach include 
studies of stranded asset risk in the fossil fuel industry, forecasts of water scarcity, and 
demographic trends related to healthy eating.  
Many investors expect the financial impacts of integrating broad ESG research to be 
realized in the long term (typically five to ten years), while they also acknowledge that 
exact time-horizons are unknown and ESG themes may increase in relevance in the 
short term as well. Since the effects 
of many macro ESG issues are 
uncertain, and the associated 
regulatory landscape is dynamic, 
broad ESG factors are especially 
difficult to quantify, presenting 
methodological 
challenges 
to 
investment teams.  
Broad ESG research may influence the construction of an investment universe,  inform 
analysis of individual companies, or inform general views on a set of related companies, 
which may in turn influence sector or even individual security allocation. 
 
The table below summarizes several examples of narrow and broad approaches to ESG 
research.  
Differentiating ESG research by scope 
 
Source: Sustainalytics, IRRCi 
 
 
Key differentiator
Example
Description
Company specific ESG issues
Research on specific material ESG company policies and practices.
Company ESG trends
Company environmental risk analysis, such as trends in carbon intensity.
ESG sector issues
Evaluation of sector-specific ESG issues, such as data privacy in the tech industry.
Systemic ESG issues
Study of macro themes, such as climate change, water scarcity and demographic change.
Regional ESG trends
Review of regional ESG trends, such as changing corporate governance regulations.
Broad ESG research
Narrow ESG research
“Regardless of whether you label me as ESG 
or not, good investing involves considering 
macro trends to inform a view of where the 
world will be.” 
– Bruce M. Kahn, PhD, Portfolio Manager, 
Sustainable Insight Capital Management

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    19 
 
 
b) The modification of ESG inputs  
Modification allows for the incorporation 
of in-house views 
Approaches to ESG integration also differ based on the extent to which they use 
modified ESG research inputs. This differentiator accounts for the degree to which 
investment teams manipulate raw ESG research, whether sourced from an external 
provider or from internal research. Modification allows investment teams to 
incorporate in-house views on ESG issue materiality and indicator relevance, among 
other factors, with company ESG ratings or other research products. At the other end 
of the spectrum, unmodified inputs refer to ESG research sourced from an external 
provider and integrated into an investor’s investment model without any 
customization. 
 
Unmodified ESG inputs 
A pragmatic way of integrating ESG 
Specific examples of unmodified ESG inputs include quantitative ESG scores from an 
external provider that are integrated, as is, into particular aspects of an investor’s 
investment model. Unmodified ESG inputs can also include qualitative research from 
an external provider, such as a review of sector-specific ESG risks and opportunities, 
although in order to be applied from a portfolio decision-making standpoint, such 
offerings typically need to be quantified.  
Unmodified ESG inputs may prohibit the type of data customization that investors are 
increasingly demanding, but they offer a consistent, pragmatic and time-efficient 
manner of incorporating ESG perspective into an investor’s investment process. Two 
common signals within the universe of unmodified ESG research include an overall 
company ESG performance rating, and an assessment of exposure to controversial 
incidents. 
 
Modified ESG inputs  
Using an in-house model to modify third-
party ESG data 
Modified ESG inputs typically involve the manipulation of externally sourced ESG data 
and research according to a proprietary in-house methodology. For instance, some 
investors have a process to incorporate certain elements of external ratings and 
analysis into an in-house rating system. Other approaches use raw ESG company data 
to generate an internal company rating. Investment decision-makers may consider the 
resulting score in isolation, or utilize it as an input in a broader assessment, such as 
overall management evaluation. 
Modified ESG inputs often reflect 
an 
investor’s 
ESG 
materiality 
analysis – a team’s view of which 
ESG factors are most relevant to 
consider in different sectors or 
regions. This internal view may be 
influenced by existing frameworks, 
such 
as 
the 
Sustainability 
Accounting Standards Board (SASB) Materiality Map.8   
“We construct proprietary ESG scores based 
on a company's performance on material 
topics, accounting for specific sector and 
country idiosyncrasies.” 
– Tim Verheyden, PhD, ESG Quant 
Researcher, Arabesque

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    20 
 
Differentiating ESG research by inputs 
 
Source: Sustainalytics, IRRCi 
 
Observations and analysis 
 
During the interview process and in the analysis of public disclosures, several insights 
pertaining to the two key differentiators of the research dimension of ESG integration 
became apparent. 
 
The growing potential of broad ESG research 
Integration within resource constraints 
While it is widely understood that assessing ESG risks and opportunities at the 
company level is an integral element in ESG integration, a growing number of 
investment teams are recognizing the importance of broad ESG research, especially as 
the far-reaching economic effects of systemic challenges, such as climate change, 
become more pronounced. Users of broad ESG research commonly hold that ESG 
factors provide an important perspective that helps inform their view of where the 
market is going, given their expectation that long-term ESG trends will shape the 
economy. Some interviewees cited resource constraints and/or the challenges of 
quantifying the longer-term, systemic impacts of macro ESG trends as primary reasons 
for not focusing on broad ESG research.   
 
Modifying ESG inputs for customized analysis    
Valuation models typically require 
modified inputs 
While many investors view external ratings as a reasonable starting point for 
understanding company-level ESG performance, those that integrate ESG inputs in 
valuation models generally seek the specificity that is offered by modified ESG inputs. 
Teams that apply a customized view of ESG materiality generally expressed the notion 
that they are better able to capture value that may be missed by other market 
participants, including those that apply different ESG integration strategies.  
 
 
Key differentiator
Example
Description
Quantitative ESG analysis
Quantitative ESG scores are used as a primary ESG input in the investment process.
Qualitative ESG analysis
External qualitative analysis is used as a primary ESG input in the investment process.
Modifying in-house ESG analysis
Third-party ESG inputs added to an in-house model that weights material ESG factors. 
Proprietary ESG weighting scheme External ESG inputs are combined in a proprietary weight matrix to produce ESG scores.
ESG ratings analysis
ESG factors are used to inform metrics that assess management quality, etc. 
Unmodified ESG inputs
Modified ESG inputs

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    21 
 
 
Dimension 3: Application 
The how of integration   
The application dimension focuses on the question of how investment teams apply ESG 
information in their investment processes. Accounting for an integration approach 
along this dimension involves identifying the entry points for ESG information in the 
investment process. 
Within this dimension, the two key differentiators for distinguishing approaches to ESG 
integration are:  
a) the use of top-down techniques, and 
b) the use of bottom-up techniques. 
As shown in the matrix below, a given approach to ESG integration can fall into one of 
four quadrants based on how it utilizes both top-down and bottom-up techniques. As 
implied by this matrix, it is possible for an approach to incorporate both top-down and 
bottom-up integration techniques.  
 
Matrix analysis of the application dimension 
 
Source: Sustainalytics, IRRCi 
 
a) Top-down integration 
 
For the purposes of this typology, “top-down” integration is the development and 
execution of an investment thesis based on a general view (as opposed to a view 
derived from fundamental analysis) of how ESG factors may create investment risks or 
opportunities. 
More top-
down ESG 
techniques
Less bottom-
up ESG 
techniques
1
2
3
4
Less top-
down ESG 
techniques
More bottom-
up ESG 
techniques

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    22 
 
Using ESG factors to define an investable 
universe of securities 
This type of integration may rely on narrow research (as described in Dimension 2 
analysis), such as company-specific ESG scores, to execute the thesis that companies 
with poor overall ESG performance 
pose significant risk and should be 
underweighted or screened out of an 
investment universe. Another example 
is building an investment thesis based 
on gender or ethnic diversity on the 
board or in senior management.9 
While some investment managers 
have long utilized traditional financial 
metrics to filter a large universe of 
securities, some managers are using 
ESG factors in a similar fashion.  
Top-down integration may also be based on broad ESG research, including macro-level 
analysis, that facilitates positive or negative views on entire industries or markets. The 
use of broad research in a top-down strategy also includes the view that companies 
involved in certain activities, such as the extraction of thermal coal, face regulatory and 
transition risk and should be underweighted or excluded from an investable universe.10 
Integrating into passive and active 
strategies 
Top-down integration techniques can be applied to both active and passive strategies. 
Integrating ESG factors into passive investments generally involves filtering or tilting 
(or both) a mainstream benchmark index using rules based on analysis of how certain 
ESG factors are likely to affect value. Common examples are low-carbon index funds 
that seek to reduce exposure to carbon risk, while maintaining other risk exposures as 
close as possible to a standard index. 
 
b) Bottom-up integration 
Integrating ESG factors into security-
specific analysis 
For the purposes of this study, “bottom-up” integration is the integration of ESG 
factors into security-specific fundamental analysis in the context of security valuation 
and selection. Investors may apply bottom-up ESG techniques to inform their 
assessment of a company’s management quality, growth prospects and risk profile.  
Varying approaches to bottom-up 
integration 
Some investment teams practice bottom-up integration using ESG data as inputs into 
their valuation models, resulting, for example, in adjustments to the discount rate or 
cash flow estimates. This practice is typically carried out using ESG indicators that are 
deemed to be financially material on a sector-by-sector basis. As such, this approach 
generally involves the use of different indicators for different industries. However, 
some managers rely on a single set of overall ESG scores obtained from an external 
ESG research provider to complement their assessment of risk or management quality. 
Bottom-up techniques can use narrow or 
broad ESG research 
Like top-down techniques, bottom-up integration may use narrow or broad ESG 
research. Bottom-up integration of narrow research considers how company-specific 
performance indicators may influence a company’s valuation or risk profile, without 
necessarily taking into consideration ESG-driven sector or macro-level trends that may 
change the environment within which companies operate. 
“The first step in a value manager’s 
process is to remove the most expensive 
stocks from consideration. We do almost 
the same thing, to avoid the worst 
performers on material ESG issues 
because they similarly represent less 
attractive long-term investment 
opportunities.”  
– Joshua Linder, formerly PM at Calvert  
“The first step in a value manager’s 
process is to remove the most expensive 
stocks from consideration. We do almost 
the same thing, to avoid the worst 
performers on material ESG issues 
because they similarly represent less 
attractive long-term investment 
opportunities.”  
– Joshua Linder, formerly PM at Calvert

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    23 
 
Stranded carbon assets analysis is an 
example of bottom-up analysis using 
broad research 
The bottom-up integration of broad research incorporates not only company-specific 
factors but also analysis of how these may interact with broader ESG-related trends in 
financially material ways. An example of this approach is risk analysis of stranded 
carbon assets in the context of valuing the reserves of a company in the oil and gas 
sector, or scenario analysis around water constraints.11 
 
The table below provides examples of top-down and bottom-up integration. 
Differentiating ESG application by entry point 
 
Source: Sustainalytics, IRRCi 
 
Top-down and bottom-up integration 
 
ESG factors can enter at different stages of the investment process. The figure below 
depicts possible ESG entry points for top-down and bottom-up integration. 
Entry points for applying ESG integration techniques  
 
Source: Sustainalytics, IRRCi 
 
 
Key differentiator
Example
Description
ESG universe screens
Removing companies from an investable universe in order to reduce investment risk.
Sustainable/ESG index universe
Defining the investible universe based on the constituents of a sustainable/ESG index.
Thematic ESG investing
Using ESG research to pursue thematic investment opportunities (e.g. healthy eating).
Sector weighting
Under/over weighting a sector relative to a benchmark based on ESG analysis.
Passive filtering for ESG factors 
Screening or tilting an index based on ESG factors, such as carbon risk.
Qualitative management analysis
Incorporating ESG into a qualitative assessment of management quality.
Company growth models
Using ESG factors to assess the economic sustainability of a company’s business model.
Discount rate models
Adjusting the discount rate used in valuation models based on ESG considerations
Margins and cash flow models
Adjusting forecasted margins or cash flows based in part on ESG factors.
Bottom-up techniques
Top-down techniques
Investment process
Company 
analysis/ 
valuation
Bottom-up entry
Security 
selection
Security 
weighting
Top-down entry
Idea 
generation
Universe 
filtering/tilting
Sector 
allocation

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    24 
 
 
Observations and analysis 
Screening with the aim of improving 
returns 
While eliminating companies from an investable universe based on ESG factors is a 
process that is often associated with 
ethical funds, many investors apply 
ESG screens to improve returns. 
Investment teams have developed 
innovative ways of filtering out 
companies that underperform on 
ESG 
criteria, 
to 
reduce 
their 
exposure to material financial risks 
or to identify firms positioned to 
realize financial value.  
Some 
interviewees 
that 
apply 
screening as a top-down technique 
observed that the line between the goal of improving returns and the goal of mitigating 
negative impact is blurred. Several investors indicated that they do not see such goals 
as being mutually exclusive because certain screens can both have sustainability 
benefits and lead to better financial performance in the long term. 
 
Same theme, different strategies 
Different ways to execute an ESG 
investment thesis 
Investment teams can execute an ESG investment thesis in a variety of ways.  
Considering the issue of water scarcity, 
one 
approach 
involves 
holding 
companies with relatively strong water 
management policies in water-intensive 
sectors, while another approach avoids 
investing in any company operating in a 
water-intensive industry. Yet another 
water scarcity ESG thesis may focus on 
gaining exposure to companies involved 
in providing solutions for water scarcity, such as water purification technologies.    
 
Limiting tracking error as a contraint on integration 
Setting tracking error limits can restrict 
applications of ESG integration 
A frequently cited constraint regarding ESG integration, especially with respect to the 
integration of broad research, is the prevalent use of market indices to measure the 
financial performance of investment portfolios. As with non-ESG focused investing, 
efforts to minimize tracking error can restrict the ability of investment teams to invest 
based on a long-term view of how different factors may influence the expected growth 
of a given sector. Many interviewees said that tracking error limits imposed by asset 
owners constrain their ability to integrate ESG information. (This observation is similar 
to the long-time complaint by fundamental managers that tracking error limits mean 
that investors want active management, but not too much active management.) 
Others stressed that while ESG integration that involves sector bets may risk short-
term underperformance, such an approach may outperform market benchmarks over 
the long run. 
“There’s nothing wrong with the moral 
case, but our Women’s Fund was very 
deliberately built on a [financial] value 
proposition, which is that companies that 
make use of their entire workforce will do 
better than those that only know how to 
motivate, train and reward half of their 
workforce.”  
 – Julie Gorte, PhD, Senior VP, Sustainable 
Investing, Pax World Management 
“Unfortunately, the market has 
arrived at a definition [of ESG] that 
focuses on how companies operate, 
and much less on the actual products 
and services that they provide.”   
–  Seb Beloe, Head of Research, 
WHEB Group

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    25 
 
 
Prevailing types 
Six prevailing types of ESG integration 
approaches  
In addition to clarifying the essential characteristics of different approaches to ESG 
integration, the analysis identified prevailing types of ESG integration. This analysis 
does not simply recognize the most common approach types observed in the data, 
although relative frequency was one consideration in the selection process. Additional 
factors, such as overall distinctiveness, degree of innovation and general market 
trends, were also taken into account.  
The analysis revealed six prevailing types of ESG integration: (1) the Believer, (2) the 
Cautionary, (3) the Statistician, (4) the Discretionary, (5) the Transition-Focused and (6) 
the Fundamentalist. An overview of the prevailing types and their relationship to the 
typology is provided below. 
Overview of the six prevailing types of ESG integration
 
Source: Sustainalytics, IRRCi 
 
 
●Decentralized
●Process to ensure 
integration
●Broad
●Modified inputs
●More top-down
●More bottom-up
The Transition-Focused
●Less top-down
●More bottom-up
The Fundamentalist
●Centralized
●Process to ensure 
integration
●Narrow 
●Unmodified inputs 
●More top-down
●Less bottom-up
The Believer
●Less top-down
●More bottom-up
The Cautionary
●Narrow 
●Modified inputs
●More top-down
●Less bottom-up
The Statistician
Application
Research
●Centralized
●No process to ensure 
integration
●Narrow
●Unmodified inputs
●Less top-down
●Less bottom-up
The Discretionary
Prevailing types
Management

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    26 
 
 
The Believer 
 
Management 
            Research 
            Application 
 
 
Source: Sustainalytics-IRRCi 
 
The Believer executes ESG integration in a manner that is clearly structured and 
consistent throughout an organization. Integral to this approach is a top-down 
application of general (i.e. not based on security-specific fundamental analysis) 
assumptions about how certain ESG factors may affect value. It usually focuses on 
security-level ESG considerations as opposed to macro ESG trends. Key characteristics 
of this approach, by dimension, are as follows: 
i) 
There is a centralized ESG management structure involving distinct ESG 
roles. ESG staff often sit together as a separate team, but they may also 
serve as ESG analysts on sector- or region-based investment teams. There 
is a process in place to ensure integration, and PMs have discretion to 
make decisions within ESG parameters established by the organization.  
ii) 
Investment teams focus primarily on narrow ESG research, although 
macro and thematic ESG research may also be considered. Typically, this 
approach involves the use of unmodified ESG scores.  
iii) 
While some bottom-up integration may occur at the discretion of 
individual PMs, the emphasis is on top-down integration techniques in 
order, for example, to filter investment universes based on ESG 
performance or risks. Some teams apply “worst-in-class” screens based 
on aggregate ESG scores with the aim of removing companies with 
greater ESG-related risks. 
This approach may involve, as noted, a limited degree of bottom-up integration, 
seeking to account for ESG risks and opportunities earlier in the investment process. 
Indeed, this approach, while asserting that ESG factors are bound to be material in the 
long term, may reflect skepticism about the ability of PMs to integrate ESG factors into 
valuation models in the context of bottom-up, fundamental analysis. 
 
 
Process to 
ensure 
integration
Centralized 
ESG 
management
3
4
2
1
Narrow 
ESG
research
Unmodified
ESG inputs
3
4
2
1
More top-
down ESG 
techniques
3
4
2
1
Less bottom-
up ESG 
techniques

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    27 
 
 
The Cautionary 
 
                        Management 
                             Research 
    Application 
 
 
 
Source: Sustainalytics-IRRCi 
 
The Cautionary approach seeks to ensure that investment teams consider ESG factors 
in order to improve risk management, focusing on company-specific research rather 
than broad ESG trends. Key characteristics of this approach, by dimension, are as 
follows:  
i) 
A centralized ESG management structure employs dedicated ESG 
specialists who deliver ESG research to investment teams and have 
opportunities for structured and sometimes mandatory dialogue with 
other analysts and PMs. ESG staff aim, among other goals, to ensure 
compliance with internal, organization-level policies, as opposed to 
providing a view on specific companies or thematic ESG issues. An 
organization may have rules and criteria that determine when ESG risks 
need to be considered by a PM. For example, the presence of major 
controversies may trigger such consideration. 
ii) 
ESG research is usually narrow, with a focus on company-specific 
downside risks. Teams largely rely on unmodified ESG research from 
third-party providers for company-level ESG assessments. 
iii) 
Teams use bottom-up integration techniques, sometimes triggered by 
organization or team-level rules and criteria as noted above, with the 
primary goal of managing idiosyncratic risk that may stem from ESG 
factors, such as involvement in major ESG controversies. 
This approach is often carried out within the confines of set parameters such as 
minimal deviation from a benchmark. While macro ESG issues may influence the 
creation of specific ESG products, such thematic issues are not systematically 
considered in ESG integration activities.  
 
 
Process to 
ensure 
integration
Centralized 
ESG 
management
3
4
2
1
Narrow 
ESG 
research
Unmodified
ESG inputs
3
4
2
1
Less top-
down ESG 
techniques
More bottom-
up ESG 
techniques
3
4
2
1

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    28 
 
 
The Statistician 
 
                       Management 
           Research 
                         Application 
 
 
Source: Sustainalytics-IRRCi 
 
The Statistician uses statistical analysis to identify correlations between historical ESG 
performance and historical financial performance with the aim of identifying material 
factors that are likely to generate alpha. This analysis is built into models that are 
applied to passive or smart beta strategies. Key characteristics of this approach, by 
dimension, are as follows: 
i) 
The processes of gathering and analyzing ESG data are typically 
centralized, and the nature of the process is such that ESG integration is 
ensured. 
ii) 
Analysis relies on narrow, historical data and typically does not 
incorporate a consideration of anticipated future impacts of ESG trends 
at the macro level. Much effort goes into identifying factors likely to 
contribute positively to future financial performance, resulting in 
modified data inputs. 
iii) 
Integration techniques are rules-based and, therefore, top-down. ESG 
factors are typically used to adjust the weightings of the constituents of 
a benchmark, tilting and/or reducing to zero in some cases.  
This approach involves an in-depth consideration of how ESG data points relate to price 
movements, often with a high degree of precision. Teams implementing this approach 
place an emphasis on the quality, comparability and historical availability of ESG data. 
 
 
Process to 
ensure 
integration
Centralized 
ESG 
management
3
4
2
1
Narrow 
ESG 
research
3
4
2
1
Modified
ESG inputs
More top-
down ESG 
techniques
3
4
2
1
Less bottom-
up ESG 
techniques

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    29 
 
 
The Discretionary 
 
                       Management 
                             Research 
                           Application 
 
Source: Sustainalytics-IRRCi 
 
The Discretionary approach considers ESG factors on an optional basis as a supplement 
to traditional financial analysis, usually with a focus on idiosyncratic risk management. 
Key characteristics of this approach, by dimension, are as follows: 
i) 
Dedicated ESG specialists, typically a small team, process ESG research 
obtained from external providers and make it available to PMs. ESG staff 
may directly support PMs on an ad-hoc basis, as ESG factors are typically 
not central to the investment team’s culture or its broader value 
proposition. A process to ensure integration through reporting protocols 
is typically not present. 
ii) 
PMs who consider ESG typically use narrow research. Teams usually rely 
on unmodified ESG scores from external research providers. 
iii) 
A consideration of ESG may, at the discretion of PMs, influence bottom-
up analysis and security selection. It rarely includes top-down integration 
techniques. When integration occurs, it focuses on security-level 
considerations and risk management, with little or no emphasis on ESG-
related opportunities. 
Teams taking this approach usually do not have a team view on how ESG factors may 
affect value, given the differences in beliefs that PMs and analysts often have on ESG 
topics. 
 
 
No process 
to ensure 
integration
Centralized 
ESG 
management
3
4
2
1
Narrow 
ESG 
research
Unmodified
ESG inputs
3
4
2
1
Less top-
down ESG 
techniques
3
4
2
1
Less bottom-
up ESG 
techniques

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    30 
 
 
The Transition-Focused 
 
                       Management 
                            Research 
                         Application 
 
 
 
Source: Sustainalytics-IRRCi 
 
The Transition-Focused approach regards ESG factors as central research inputs, and 
concentrates to a significant degree on risks and opportunities associated with broad 
ESG-related economic shifts, ESG thematics and sustainability challenges. Key 
characteristics of this approach, by dimension, are as follows: 
i) 
A decentralized ESG management structure may be supported by 
dedicated specialists, and mechanisms are in place to ensure that teams 
draw on ESG factors in the investment processes. Analysts and portfolio 
managers have significant ESG resources at their disposal. Investment 
teams consider ESG integration to be an important part of their culture 
and their external value proposition. 
ii) 
Broad ESG research is essential to understanding and assessing ESG-
related risks and opportunities both at the company level and at the 
industry level. This research is supported by a firm’s own in-depth ESG 
analysis, which is used to modify research from third-party providers.  
iii) 
Teams combine top-down and bottom-up integration techniques. ESG-
related trends and issues, such as climate change, water scarcity and 
healthy eating, serve as major sources of idea generation. These themes 
may influence the construction of an investment universe as well as 
sector weightings. They are also integrated into bottom-up analysis to 
determine how well positioned a company is to benefit from macro 
themes. 
This approach typically includes a readiness to deviate from sector weightings in 
mainstream benchmarks, and by the intention to contribute to the transition to a more 
sustainable economy. Teams typically monitor the ESG performance of their portfolios 
in a structured and continual manner. 
 
 
Process to 
ensure 
integration
Decentralized 
ESG 
management
3
4
2
1
Modified
ESG inputs
Broad 
ESG 
research
3
4
2
1
More top-
down ESG 
techniques
3
4
2
1
More bottom-
up ESG 
techniques

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    31 
 
 
The Fundamentalist 
 
                        Management 
                           Research 
                          Application 
 
 
 
Source: Sustainalytics-IRRCi 
 
The Fundamentalist aims to integrate ESG factors thoroughly into bottom-up analysis 
and decision-making by considering company-specific ESG factors as well as macro ESG 
trends that may affect company’s performance over short- and long-term time 
horizons. Key characteristics of this approach, by dimension, are as follows: 
i) 
A decentralized ESG management structure places responsibilities for 
ESG integration with analysts and PMs, who typically regard ESG factors 
as material and important considerations in the valuation process. Teams 
do not usually treat ESG research and analysis as distinct from other 
elements of their financial analysis. Managerial oversight and/or team 
culture ensure that ESG factors are diligently accounted for when deemed 
to be material.  
ii) 
A broad research focus incorporates information about security-specific 
as well as thematic and macro ESG considerations. Investment teams 
typically do not view a company’s overall ESG score as a reliable measure 
of ESG risk or opportunity. Instead, they focus on company performance 
in specific areas based on their ESG materiality analysis, which considers 
sector exposures as well as the business models of individual companies. 
They often draw on and combine ESG data from multiple external sources 
to generate internal scores.  
iii) 
Teams integrate ESG factors systematically through bottom-up 
techniques, considering both related risks and opportunities. They often 
conduct scenario analysis to forecast the possible outcomes of ESG 
controversies, or improved ESG performance.   
Teams taking this approach often view ESG integration as an important component of 
their fundamental analysis and investment process and are confident about being able 
to quantify ESG risks and opportunities meaningfully, and to integrate them into 
traditional analysis and models. They also view ESG integration as warranting 
significant resource and time investments.  
Process to 
ensure 
integration
3
4
2
1
Decentralized 
ESG 
management
Modified
ESG inputs
Broad 
ESG 
research
3
4
2
1
Less top-
down ESG 
techniques
More bottom-
up ESG 
techniques
3
4
2
1

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Market observations 
Candid commentary about the state of 
the market 
In addition to driving the development of the differentiators and prevailing types 
discussed above, the research collected for this report yielded a number of high-level 
findings about the general state of ESG integration in today’s investment market. The 
35 investor interviews were particularly useful in this respect, as participants often 
offered candid commentary on a wide range of topics, including concerns about 
integration practices and industry barriers, as well as opportunities for developing 
innovative ESG strategies. Five general observations about the ESG landscape distilled 
from the research are highlighted below.  
 
The extent of integration  
PMs do not always use the ESG research 
that they have access to 
The analysis of investors’ management of ESG integration (Dimension 1) suggests that 
there may be less actual integration taking place than expected by the market. It 
became apparent through our interviews that a system to get ESG information into the 
hands of investment decision-makers is ultimately insufficient to guarantee ESG 
integration, particularly with regard to bottom-up techniques (i.e. security valuation). 
Some of the investors interviewed were candid about the lack of an information trail 
or reporting system within their organizations to demonstrate how frontline 
investment decision-makers use ESG research. This might mean that PMs are not fully 
utilizing the ESG research that they have access to, even at organizations that have 
publicly expressed support for ESG integration. 
It is difficult to determine the actual state 
of ESG integration  
While some organizations may be overstating the degree to which their investment 
teams are actually using ESG information in portfolio management and decision-
making, it is also possible that genuine integration is occurring at organizations that 
have not publicly embraced ESG (by, for instance, becoming a PRI signatory). Portfolio 
teams at these firms may consider ESG issues to be material components of their 
standard investment procedures without regarding them as distinct from other 
financial factors. The actual state of ESG integration is, therefore, uncertain.  
 
Challenges of meaningful ESG integration  
Using ESG in bottom-up, security-specific 
investment models is particularly 
challenging 
Many interviewees opined that, despite marked improvements in integration tools and 
the continued groundswell of investor interest in ESG’s potential, integrating ESG 
remains a fundamentally challenging enterprise. Some singled out the practice of 
integrating ESG information using bottom-up techniques as particularly challenging, 
due to the difficulties of embedding ESG analysis in investment models and linking to 
such items as projected cash flows or a company’s discount rate. Interviewees stressed 
that such techniques are resource intensive and typically require modified research 
and robust sector-by-sector materiality analysis. This consideration has certainly not 
stopped some asset managers from successfully employing bottom-up techniques (see 
p. 23 for an overview) but interviewees generally signalled that such efforts are at an 
early stage.

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    33 
 
 
Improving ESG research 
Investor concerns with external research 
providers 
Interviewees indicated that the quality of ESG research, analysis and ratings varies 
substantially from one resource to another, and many investment teams drawing on 
external sources have concerns about research reliability, timeliness, transparency and 
geographic coverage (particularly for emerging markets). Many of these concerns 
reflect the relatively brief history and limited availability, reliability and comparability 
of corporate ESG disclosures. 
Recent improvements in the timeliness 
and quality of ESG data 
However, many investors with longstanding ESG integration strategies cited a notable 
increase in the timeliness and quality of ESG data points in recent years, driven in part 
by an improvement in corporate disclosure. 
Finding corroborating evidence 
Some firms address questions of data consistency and relevance by looking for 
corroboration in other data sources. For instance, combining multiple sources of ESG 
analysis can offer more comprehensive viewpoints on key ESG issues than single 
sources of research. When working with external providers, maintaining lines of 
discussion with advisors and analysts can improve the quality and timeliness of 
integration strategies.  
 
Lifting constraints on ESG innovation 
Benchmarks and long-term investing 
Some asset manager interviewees stated that some of the parameters established by 
many asset owners in their investment policies – most notably requirements to cap 
tracking error and deviations from benchmark sector weights – constrain the extent to 
which they can incorporate ESG information into investment strategies. Indeed, some 
hold that such constraints are limiting innovation in the industry. While such 
constraints may offer volatility protection vis-à-vis a benchmark, they can also make it 
difficult for asset managers to implement certain approaches to ESG integration, 
especially those that consider broad research and analysis of macro-level themes. 
 
The relationship between materiality and impact 
An investment rationale for impact 
Some large investors are paying increasing attention to companies’ sustainability 
impacts and how these impacts may generate systemic risks that can jeopardize 
economic value. Among those using top-down techniques, some interviewees 
maintained that there is an investment case for applying certain ESG filters and aligning 
investments with the broader goal of creating a sustainable economy. Some see the 
two rationales as complimentary, and the line between the two has become blurred 
for many. Some asset owners are making investments – often through ESG allocations 
outside their core investment portfolios – in projects, sustainability funds or green 
bonds where there is a clear intention to have a positive impact.  
 
This observation is in line with the findings of a recent report by the Investment 
Integration Project (TIIP), which carried out an extensive survey of the investments that 
some institutional investors are making with the intention to effect positive change in 
the health and resilience of the environmental, social and financial systems upon which 
wealth creation depends.12

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    34 
 
 
Conclusion 
 
Reviewing key contributions  
Classifying approaches to ESG integration 
Making sense of the different ways in which investors are applying ESG information to 
their investment processes is likely to take on greater importance in the years ahead, 
as investors explore increasingly innovative ESG integration techniques. It is hoped 
that the typology put forward in this report contributes to this goal by helping market 
participants a) identify the essential characteristics of ESG integration and b) organize 
the approaches to ESG integration that have been deployed in the market to date.  
Promoting discussion of prevailing types 
The prevailing types analysis stands as a unique characterization of current investor 
practices in the ESG market. It is hoped that identifying the six prevailing types – the 
Believer, the Cautionary, the Statistician, the Discretionary, the Transition-Focused 
and the Fundamentalist – promotes discourse about where certain approaches may 
fall, and where the industry may be trending. 
Market observations convey investor 
perspectives 
The five high-level market observations included at the end of this report offer a 
snapshot of investor perspectives on the ESG integration landscape. It is hoped that 
these findings stimulate discussion about the state of the industry and some of the 
challenges and opportunities associated with ESG integration. 
 
Looking ahead  
 
While the typology assembled in this study can help market participants classify 
existing approaches to ESG integration, it will be important to revisit this analysis to 
see if the differentiating features of ESG integration shift over time. Recent innovation 
in approach types, coupled with increasingly sophisticated investor tools, and more 
and higher quality corporate ESG information, underscore the importance of this line 
of research.

How Investors Integrate ESG: A Typology of Approaches                                                                                                     April 2017                          
 
 
  
                    
 
    35 
 
Endnotes 
1 
Global Sustainable Investment Alliance (2017), The 2016 Global Sustainable Investment Review, last accessed (04.03.2017) at: http://www.gsi-
alliance.org/wp-content/uploads/2017/03/GSIR_Review2016.F.pdf. 
2 
Global Sustainable Investment Review (2017), op. cit. 
3 
UN PRI (2016), A Practical Guide to ESG Integration for Equity Investing, last accessed (17.02.2017) at: 
https://www.unpri.org/download_report/22600. 
4 
UN PRI (2013), Integrated Analysis: How investors are addressing environmental, social and governance factors in fundamental equity valuation, last 
accessed (17.02.2017) at: https://www.unpri.org/download_report/3950. 
5 
We define top-down integration as the development and execution of an investment thesis based on a general view (as opposed to a view derived 
from fundamental analysis) of how ESG factors may create investment risks or opportunities. 
6 
We observed a total of 22 discrete approach types in the dataset. 
7 
Röhrbein, Nina (2010), “ESG risk in a portfolio context,” Investment & Pensions Europe, last accessed (17.02.2017) at: https://www.ipe.com/esg-
risk-in-a-portfolio-context/34522.fullarticle. 
8 
SASB Materiality Map (2017), last accessed (17.02.2017) at: https://www.sasb.org/materiality/sasb-materiality-map/. 
9 
Dawson, J. Kersley, R. and Natella, S. (2016), The CS Gender 3000: The Reward for Change, Credit Suisse Research Institute, last accessed 
(16.01.2016) at: http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=5A7755E1-EFDD-1973-A0B5C54AFF3FB0AE. 
10 
This refers to risks associated with a presumed transition to a low-carbon economy. This type of risk has been highlighted, for example, by the work 
of the Task Force on Climate-related Financial Disclosures (TCFD). TCFD website, last accessed (17.02.2017) at: https://www.fsb-tcfd.org/. 
11 
The TCFD considers scenario analysis important. See also: The Investor Group on Climate Change and The Asia Investor Group on Climate Change 
(2017), The Transparency in Transition a Guide to Investor Disclosure on Climate Change, last accessed (17.02.2017) at: 
http://www.igcc.org.au/resources/Pictures/IGCC%20TRANSPARENCY%20in%20TRANSITION%20FINAL.pdf. 
12 
Burckart, W., Lydenberg, S., and Ziegler, J. (2016), Tipping Points 2016: Summary of 50 Asset Owners’ and Managers’ Approaches to Investing in 
Global Systems, The Investment Integration Project and the Investor Responsibility Research Center Institute (IRRCi), last accessed (17.02.2017) at: 
http://tiiproject.com/tiiping-points-2016/.

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    36 
 
Appendix A: Investors 
Interviewed investors 
Institutional Investor
Country
Assets under 
management (USD mn)* Interviewees 
Aberdeen Asset Management
UK
428,792
Fionna Ross, Senior Analyst, Responsible Investing
ACTIAM
Netherlands
571,001
Thierry Oeljee, Senior Engagement Specialist
Bas Wetzelaer, ESG Analyst
Addenda Capital
Canada
18,630
Brian Minns, Manager, Sustainable Investing
Alliance Trust
UK
7,232
Neil Brown, SRI Investment Manager
AMF
Sweden
61,847
Christer Jönsson, Head of Global Equities
Annelie Götbring, Head of Responsible Investments, Equities
Arabesque Partners
UK
32
Tim Verheyden, PhD, ESG Quant Researcher
Auriel Capital
UK
12
Antti Savilaakso, Partner
BlackRock
US
4,635,000
Michelle Edkins, Managing Director, Global Head of BlackRock Investment Stewardship
Breckinridge Capital Advisors
US
23,305
Rob Fernandez, Vice President
California Public Employees' Retirement 
System (CalPERS)
US
288,900
Divya Mankikar, Head of ESG Integration
California State Teachers' Retirement 
System (CalSTRS) 
US
192,000
Anne Sheehan, Director of Corporate Governance
Brian Rice, Investment Officer
Calvert Investments
US
12,119
Joshua Linder, formerly PM at Calvert 
ClearBridge Investments
US
107,500
Mary Jane McQuillen, Managing Director, Portfolio Manager, Head of ESG Investment
Colonial First State Global Asset 
Management
Australia
142,925
Pablo Berrutti, Head of Responsible Investment, Asia Pacific
Global Alpha Capital Management
Canada
359
Qing Ji, Portfolio Manager
Goldman Sachs Asset Management
US
1,028,665
Maria Elena Drew, Portfolio Manager
Hermes Investment Management
UK
27,700
Louise Dudley, Portfolio Manager
Maxime LeFloch, Manager, Responsible Investment
Mackenzie Investments
Canada
46,700
Adam Gofton, Associate Portfolio Manager
Nationale Nederlanden Investment Partners 
(NNIP)
Netherlands
203,868
Nina Hodzic, formerly Senior Specialist Responsible Investing
Northcape Capital
Australia
9,000
Patrick Russel, Director
Ossiam
France
2,410
Carmine De Franco, Quantitative Analyst
Bruno Monnier, Quantitative Analyst
Parametric
US
179,000
Jennifer Sireklove, Director, Investment Strategy 
Pax World Investments
US
3,630
Julie Gorte, PhD, Senior VP, Sustainable Investing
PGGM Investments
Netherlands
199,819
Jelena Stamenkova van Rumpt, Advisor Responsible Investment
Saskia van den Dool-Gietman, Senior Advisor Responsible Investment
Robeco
Netherlands
292,242
Masja Zandbergen-Albers, Head Analyst, Global Equity
Royal Bank of Canada Global Asset 
Management (RBC GAM)
Canada
301,000
Benjamin Yeoh, Senior Portfolio Manager
Storebrand
Norway
67,301
Philip Ripman, Senior Analyst, Sustainable Investments
Sustainable Growth Advisors
US
6,014
Patrick Holway, Client Portfolio Manager
Sustainable Insight Capital Management
US
118
Bruce Khan, PhD, Portfolio Manager

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    37 
 
* AUM data based on most recent figures found in PRI Transparency Reports 
 
 
Non-interviewed investors 
 
* AUM data based on most recent figures found in PRI Transparency Reports 
 
Institutional Investor
Country
Assets under 
management (USD mn)* Interviewees 
Swiss Reinsurance Company (Swiss RE)
Switzerland
117,669
Andreas Spiegel, Head Group Sustainability Risk
TIAA
US
628,541
Sarah Wilson, Director, Responsible Investment
Khalid Husain, Director, Environmental, Social and Governance Investing
Vescore
Switzerland
16,000
Eckhard Plinke, PhD, formerly Head of Sustainability Research
Wellington Management
US
969,000
Andrew Morales, Assistant Vice President, ESG Analyst
Wells Fargo Private Bank
US
200,000
Lloyd Kurtz, Senior Portfolio Manager and Head of Social Impact Investing
Claire Veuthey, Senior Analyst, Social Impact Investing
WHEB Asset Management
UK
182
Seb Beloe, Head of Sustainability Research
Institutional Investor
Country
Assets under 
management (USD mn)* Institutional Investor
Country
Assets under 
management (USD mn)*
Acadian
US
66,835
Generation Investment Management
UK
12,007
Allianz SE
Germany
481,870
Impax Asset Management
UK
4,660
Amalgamated Bank
US
12,759
J.P. Morgan Asset Management
US
1,722,543
AMP Capital
Australia
117,066
Julius Baer Group
Germany
45,443
Amundi Asset Management
France
1,073,883
Legal and General Investment 
Management (LGIM)
UK
1,115,000
Astra Investimentos
Brazil
150
NEI Investments
Canada
4,489
Australian Ethical
Australia
854
Nissay Asset Management
Japan
71,326
AXA
France
729,827
North Star Asset Management
US
257
BankInvest Group
Denmark
11,117
Northern Trust
US
87,530
Bell Asset Management
Australia
475
ODIN Fund Management
Norway
4,825
Boston Trust & Investment Management US
6,947
Parnassus Investments
US
15,645
British Columbia Investment 
Management Corp (BCIMC)
Canada
92,998
PIMCO
US
1,071,912
Capital Group International
US
81,000
Red Mountain
Australia
2,780
Cohen & Steers
US
59,100
Redpoint Investment Management
Australia
2,865
Columbia Threadneedle Investments
UK
143,885
Silk Invest
UK
246
Deutsche Asset Management
Germany
1,303,361
T. Rowe Price
US
763,100
First Reserve Corporation
US
13,850
Vancity Investment Management
Canada
773
Fisher Investments
US
65,437

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    38 
 
Appendix B: Initial Framework 
Dimension 1: Management 
1. Structure of ESG-related roles: How are ESG-related roles structured in an organization?  
2. ESG training: Do ESG staff or others participate in a structured training programme?   
3. ESG incentives: Are key performance indicators and/or variable pay linked explicitly to ESG metrics?   
4. Compliance mechanism: Is there a process to ensure that ESG issues are being considered?   
 
Dimension 2: Research 
5. Research source: Is external or internal ESG research and analysis the primary source for investment decisions? 
6. Internal rating system: Do investment teams apply an internal ESG rating? 
7. Level of research: Do investment teams have access to and apply sector/macro level research? 
8. Materiality of ESG issues: Who determines whether an ESG issue is material to an investment decision?   
9. Information management: How is ESG information stored and disseminated? 
10. ESG momentum: Is the momentum of ESG performance (improving of deteriorating) considered? 
11. Reporting: Is the consideration of ESG factors documented? 
 
Dimension 3: Application 
12. Idea generation: Are ESG factors being considered at the pre-investment stage to generate investment ideas 
(e.g., healthy eating trends create revenue growth opportunities for certain food companies)? 
13. Screening: Is the investable universe being constrained based on ESG factors? If so, is the rationale to do so 
based on ethics/norms, or a belief that the remaining companies are better positioned to perform well 
financially?  
14. Scoring: Is there an ESG score (internally generated, or applied by external provider) that is associated with an 
individual security? 
15. Sector allocation: Do ESG factors affect the target weightings of sectors within portfolios, or do they keep sector 
weights in-line with that of mainstream benchmarks? 
16. Valuation: Are ESG inputs integrated into a valuation model (e.g., this could involve using ESG inputs to adjust 
revenue estimates, the discount rate used in a financial model)? 
17. Weighting: Do ESG factors influence the portfolio weighting of securities? 
18. Monitoring: Is the ESG performance of securities/portfolios monitored on an ongoing basis?