What You Need To Know About ESG Integration When It Comes To The SEC

As people start investing, it is only natural to want to invest in organizations and funds that share the same values as they do. This is one reason many companies have publicly declared their new green initiatives and sustainability programs. However, just because an organization or fund claims to be focused on ESG matters doesn’t mean they do, or at least not to their fullest capability.

ESG stands for environmental, social, and governance investments. ESG is a standard screening measure for companies and funds used by investors who want to invest ethically. Environmental measures are how a company’s procedures affect the planet and its corporate attitude toward climate change. Social measures examine the company’s relationships with its employees, customers, and audience. And governance measures the values of the company’s leadership and their shareholders.

ESG integration, according to the SEC, is one of the many new categorizations proposed to help determine which funds are truly committing to ESG strategies.

What Is an ESG-Integration Fund

We have established how ESG works as a screening measure for investors who want to determine an organization or fund’s ethicality before investing; however, a variety of ESG strategies are available to investors.

The SEC has made proposals to create standards for these varying ESG strategies, so investors can make informed decisions. Previously, there was a lot of disinformation about companies’ ESG practices, leading to investments in companies and funds that were doing the bare minimum regarding sustainability. This brings us to the first of the three new categories of investment strategy; ESG-Integration.

ESG integration, according to the SEC, is the strategy with the least commitment to ESG practices. Previously, any organization that factored ESG into its funds could rightfully claim itself as an ESG-focused fund. But with the new categorization by the SEC, if ESR is a secondary priority, they now fall under the category of ESG integration. This distinction can help investors make better ethical decisions with their money.

What is an ESG-Focused Fund

An ESG-Focused fund is a fund that prioritizes ESG factors when screening and selecting investments. Unlike integration, which doesn’t account for ESF factors in every screening and decision, an ESG-focused fund typically performs ESG screens to determine which companies are included in the fund.

What Is an ESG-Impact Fund

An ESG-Impact fund is an extension of the focused fund, and to qualify for the SEC category, it must meet the same requirements. However, an ESG-impact strategy must have a stated goal that is determining the behaviors of the fund. For example, the goal of the fund could be to provide cleaner water to the world. Then the fund would have to show how the fund’s investments led to that goal. These goals typically have to be clear and measurable in order to meet the criteria.

Why ESG integration, According to the SEC, is Important

The biggest variable to becoming a successful investor is being well-informed. And with the new categorizations by the SEC, ethical investors can better understand the strategies being practiced by ESG funds.