Investment Finance – Chasing Tales

A tiny primer on principles of finance

While finance is a vast and multifaceted industry, there are certain principles that underpin every decision or transaction made by it. This post is an explanation of these principles.

Time Value of Money (TVM)¹ ² ³
This principle says that money available earlier is worth more than an identical sum available at a later time; so money in the past was worth more than the same amount today, and any amount today is worth more than the same amount at a later date.

The reason this happens is threefold:
1. Interest:⁴ ⁵ money available at an earlier date can be invested to earn an interest that increases that total quantity of money available at the later date. Interest is a fee paid to any entity (such as an individual, a group, or an organisation) when that entity allows another entity to use its money. For example, if a person deposits their salary in a savings account, the bank pays them interest for keeping the money and making it available for use by the bank. Conversely, if an organisation gives another organisation a loan, the borrower pays the lender interest as a fee for being able to access and use those funds.

2. Compounding:⁶ ⁷ in finance, interest is of two types- simple interest and compound interest. If money is invested so that it earns simple interest, it will earn interest on the original sum that is invested, and only on that amount. Let’s say an individual invests INR 1,000 for 5 years at a simple interest of 10% per annum, they will get an interest amount of INR 100 per annum for 5 years if they do not withdraw any of the original money they deposited (the INR 1,000 which is called the “Principal” in finance). Therefore at the end of their investment period, they will receive INR 1,000 + INR 100 + INR 100 + INR 100 + INR 100 + INR 100 = INR 1,500.

Compound interest pays a higher rate of interest, because as long as the interest amount earned at the end of the first year was not withdrawn, that INR 100 of interest would also earn an interest (unlike SI which only pays interest on the principal amount of INR 1,000). So, if the individual who invested the INR 1,000 had invested at a rate of 10% compound interest annually, at the end of Year 1, they would receive the same amount as with SI- INR 100, but at the end of Year 2, they would receive 10% interest on INR 1,000 + 10% interest on the INR 100 interest amount that was added to the investment at the end of Year 1. Therefore at the end of Year 2, they would have a total amount of INR 1,000 + INR 100 + INR 100 + INR 10 in their account.

Here’s a table to help explain this better:

Year	Simple Interest: Year-end Total (INR)⁷	Compound Interest: Year-end Total (INR)⁶
1	1,100 (Principal 1,000 + Interest: 10% × 1,000 = 100)	1,100 (Principal 1,000 + 10% of 1,000 = 100)
2	1,200 (Last year total 1,100 + Next 100 interest)	1,210 (Last year total 1,100 × 10% = 110; 1,100 + 110)
3	1,300 (Last year total 1,200 + Next 100 interest)	1,331 (Last year total 1,210 × 10% = 121; 1,210 + 121)
4	1,400 (Last year total 1,300 + Next 100 interest)	1,464.10 (Last year total 1,331 × 10% = 133.10; 1,331 + 133.10)
5	1,500 (Last year total 1,400 + Next 100 interest)	1,610.51 (Last year total 1,464.10 × 10% = 146.41; 1,464.10 + 146.41)

Tabular explanation of the difference between calculations for simple interest and compound interest

Therefore in SI, each year the interest is always INR 100 (just 10% of 1,000), added without change, but in compound interest, each year new year interest is calculated on a bigger amount (previous year’s total), so the yearly interest keeps growing. Notice the difference- via compounding, the investor would have earned INR 110.51 more after the five year period of investment.

3. Inflation:⁸ The final reason is something called inflation, which is the rise in the general price levels in the economy (that is, in general, the prices rise or the amount you can buy for a certain amount of money reduces, even if some things remain static in price or may have even reduced in per unit price), which makes it so that the same amount of money will purchase fewer goods and services at a later date, since they have become more expensive in comparison to an earlier date.

Materiality
More here.

Risk
In finance, “risk” means the uncertainty or variability of returns associated with an investment.⁹ ¹⁰

There are multiple types of risk in finance. Some risks affect everything, and they simply cannot be avoided, but others can be minimised.

1. Systematic (or sometimes called systemic) Risk:¹¹ those risks that affect the entire national economy, or in these interconnected times, affect most of the world at the same time. The 2008 subprime financial crisis was an example of one such issue. Imagine somebody, may it never be so, lives in a country that is at war- most sectors in the economy of such a country are likely to be affected by the war. It is unlikely that they could invest in a sector that is not affected at all, not even indirectly. Such risks are simply impossible to minimise. How to know if something is a systemic risk- ask, can the risks be avoided? No? It’s systemic.

2. Unsystematic (unsystemic) Risk:¹¹ those risks that affect only one sector in the entire economy, or an industry, or even one company. Imagine a corruption scandal erupts at a particular company- the risk will be limited to the company, or at most the industry the company belongs to, rather than spread through the entire national economy. Can the risks avoided? Yes, easily.

Understanding risk helps individuals make better decisions. There are several specific types of risk that are explained briefly in the table.

Type	Meaning (Simple Words)	Example For Beginners
Market Risk	Prices move because of the whole market	Stocks fall when economy dips
Credit Risk	Borrower may not repay money	Person takes a loan and can’t pay it back
Liquidity Risk	Can’t sell asset quickly for fair price	You own a rare toy, but no one wants to buy it today
Operational Risk	Failure inside a company (mistake, fraud)	Computer glitch at a bank
Inflation Risk	Money loses buying power over time	Prices of groceries go up, money buys less
Currency Risk	Foreign money value changes	INR to USD exchange rate changes
Reputational Risk	Bad publicity affects business	News breaks that a company did something unethical

Types of risk

Risk and Return Tradeoff¹² ¹³
Now, in the example in the Time Value of Money section, we knew exactly how much interest would be earned by the investment. However, there are many avenues of investment that do not guarantee any returns, and may even lead to losses.

Generally speaking, the higher the risk any investor takes, the higher their expectations of returns for that risky investment. Think about it- if they could achieve the same returns for a lower amount of perceived or actual risk, then would they not opt for getting the same returns for the lower returns? In this way, each percentage point of higher risk taken must reward the risk taker with greater returns, or they would have no incentive to take the extra risk at all.

This is called also called the Efficient Frontier. It is a graph where the x-axis maps the risk taken, and the y-axis represents the returns for each point of risk taken. Points to keep in mind:
1. For any given level of risk, the aim is to receive the highest possible expected return; and
2. For any given expected return, the aim is to take the lowest possible risk.

Any investment that doesn’t meet these conditions is inefficient: either the investment involves too much risk for the amount of returns they are offering, or too few returns for the amount of risk being taken.

But what is “too much risk”?

Every individual has a particular “Risk Tolerance”, or their personal capacity to withstand losses in case something goes wrong with their investments. Investors must always understand what their personal capability is to stomach losses, and this is also why investments must be risk efficient, so that on the occasion of a loss, that loss is not more than they can tolerate. This is a matter of personal comfort with loss.

Risk tolerance is determined for each individual via multiple factors, such as how soon they need the money invested- those with long investment horizons (let’s say 50 years for example), may invest and easily tolerate shorter term losses since their investment has the time to build back up (this may never happen, but they still have the time to see if it will). Another factor is how much money they have outside of the particular risky investment in question. Those with a large nest egg will naturally feel safe even if the entire amount invested in the riskier investment were to disappear.

Every individual has a different personal relationship with financial risk, which they must understand thoroughly and stay within their own limits.

Diversification¹⁴ ¹⁵ ¹⁶ ¹⁷
Diversification is the risk management strategy of spreading investments across various assets to reduce exposure to any single investment (an asset is anything that will earn you returns in the future, this post has other such definitions). Diversification is best explained as not putting all your eggs in one basket. By spreading investments across multiple assets classes, geographies, and industries, an investor gains the benefit of never leaving their entire investible corpus or all their savings at the mercy of an unsystematic risk event. If there is an event that affects the entire economy, diversification will not help for any asset classes that are based (fully or partially) in that region, but this too can be diversified against these days- it is now possible to invest in other countries, and this works against the kind of systematic risk that spreads only within the boundaries of a particular nation. In case the risk event has spread across the globe… well, that’s you done for the moment.

Efficient Market Hypothesis¹⁸ ¹⁹ ²⁰ ²¹
Imagine if an individual wanted to buy a house, and the only thing they know is the area they wish to purchase the house in, and what their own budget is. They find out that in that area, no house sales have taken place at all in the last few years (even though it is a residential area with 100s of houses). How would such a person determine what buying the house in the locality would cost them?

They won’t, because there is no historic price or volume data available at all, and they may withdraw from buying in the area. It is also possible that they decide to pay whatever they are asked for as long as it is within their budget, but there is no way for them to know whether they are receiving the correct value for the money they are being asked to pay, since there is no comparison available.

Now imagine two houses are sold in the same area- let’s say one for INR 30,00,000 and another for INR 35,00,000: so now the buyer has price data and volume data both- two houses, and around INR 30-35,00,000. Are they likely to offer somewhere in the vicinity of these numbers for any house they may wish to buy, or are they likely to offer much less or more than the established price level? In case the buyer chooses to offer less than the established price level, they are unlikely to get any sellers, correct? And why would they offer much more than the established price level?

In a financial market, when the historical price and volume data is known, that market is considered to be at the first level of market efficiency, called Weak Efficiency. It is data without which no fair transactions are possible.

Now, let us say the buyer decides on a few houses they really like, and to find out more about them, they go and ask neighbours about whether those houses are well built, or have any issues. etc. This information is publicly available, and is likely to shape their opinions about the properties in their shopping cart. Let us imagine one of the houses has a well known termite problem- is this new publicly available information likely to change the buyer’s valuation of the product? Then they find out another house in the locality that they have their eyes on has built in parking space for 5 cars- even if they themselves don’t have five cars yourself, are they more likely to look at this house more favourably? Perhaps offer a little more for it in comparison to other houses?

In a financial market, this is the second level of market efficiency. It is called Semi-Strong Efficiency. All publicly available information is known to everyone.

And now back to 1984: Strong form market efficiency, where there is no private information- all information, no matter how seemingly private, is known publicly. Clearly (thankfully), such a world does not exist. In the context of markets, this means that there will always be insiders who will know more than outsiders.

One thing to note here before we move on- since we’re talking about financial markets, the theory is about stock prices.

Information Asymmetry²² ²³ ²⁴
Information asymmetry is the situation where one party in a transaction possesses more or better information than other parties, which leads to outcomes that are optimal only for the party with the good information.

Information problems have significant implications for financial markets. For example, because borrowers know their own financial conditions better than lenders, lenders may not be able to assess the potential borrowers true creditworthiness. Assets may also be priced wrongly due to information asymmetry, again causing inefficiency in the market.

There are several market intermediaries that help lower information asymmetry, such as credit rating agencies that assess an individual or organisation’s creditworthiness so that lenders may have a level playing field; auditors, who provide independent verification of organisation’s financial claims, and even IPO grading agencies (IPO = Initial Public Offering) that independently evaluate a company’s financial credentials when it is issuing shares to help investors make more informed decisions before subscribing to that IPO.

Agency²⁵ ²⁶ ²⁷
A Principle-Agent relationship is the relationship between the owners, or Principals, and the people who work for them, such as managers, or Agents.

The larger an organisation, the more agents there will be, and the more information asymmetry there will be between the owners and their agents. Add to that the fact that Agents and Principals have very different inherent motivations, and it’s easy to see conflicts of interests arising between these parties.

The Principal-Agent problem can manifest in a number of ways, for example, managers may be more interested in short term profits while shareholders may wish to build their organisation up to ensure long term value; or managers may avoid risky but profitable projects over the worry that if it goes wrong they may lose their job even if the shareholders would prefer to go for the project, etc. Information asymmetry exacerbates these issues, as managers typically know more about what is happening in the company and the decisions being taken than shareholders.

Several mechanisms exist to counter agency problems. Monitoring agent behaviour and decisions through audits and oversight as well as strong corporate governance helps ensure management acts appropriately. Aligning the incentives of the management and the shareholders can be done through compensation packages that include profit-sharing with employees.

Stakeholders²⁸ ²⁹
All those individuals, or groups of individuals, who are affected by the activities of the company are stakeholders of that company. Stakeholders may be internal or external. The table below has examples:

Type	Example	How They’re Impacted
Internal	Employees	Their jobs, pay, and stability depend on the business.
Internal	Management	Make decisions and want success for their own reputation and bonuses.
Internal	Board of Directors	Set the company’s big-picture vision, provide oversight, and uphold good governance.
Internal	Shareholders	Invested money in the company, want profits and growth.
External	Customers	Use the products or services produced by the company, seek quality, safety, and value.
External	Suppliers	Sell goods and supplies, need reliable buyers and prompt payments.
External	Lenders	The company owes them money.
External	Debtors	They owe money to the company.
External	Community	Care about jobs, environment, local development.
External	Government	Collect taxes, set regulations, interested in company compliance and economic contribution.

Every stakeholder benefits in some way when the company succeeds, and can be hurt if things go badly. In finance, all decisions were made earlier from the perspective and for the benefits of shareholders only. This is now changing towards more holistic stakeholder management which balances (or attempts to) the shareholders’ requirement for profits while also making sure that other stakeholder’s points of views are incorporated into decision making. This is called Stakeholder Capitalism (as opposed to regular capitalism), and it aims to create long term value for everyone affected by the company rather than just prioritising shareholders.

These are a web of financial concepts that build all financial logic. All higher financial concepts are based on one or an interaction of these concepts. I’ve explained the very basics of these concepts here from my own understanding, but please use all the sources provided through the post as a further reading library.

Sources

ESG investing

First, a list of definitions:

Asset: Any resource of economic value owned or controlled by an individual or entity, expected to provide future financial benefit.
Asset Class: Broad categories of assets that behave similarly, e.g., equities (stocks), fixed income (bonds), cash, real estate.
Asset Type: Specific forms within an asset class, e.g., large cap, small cap stocks within equity.
Portfolio: A collection of investments held by an individual or entity.
Portfolio Weight: The percentage each asset contributes to the total value of a portfolio.
Asset Allocation: The strategy for distributing investments among different asset classes for balancing risk and return.
Diversification: Investing in different assets to reduce overall portfolio risk.
Rebalancing: Adjusting asset proportions in a portfolio to maintain target allocation that had been decided at the time of deciding asset allocation.
Liquidity: How easily an asset can be converted to cash without affecting its price.
Risk: The chance an investment might lose money or underperform expectations.
Risk Tolerance: Willingness or ability to withstand investment losses or volatility.
Volatility: The degree and frequency of changes in prices of an asset.
Portfolio Risk: The uncertainty of the entire basket of investments losing value or performing below expectations.
Market Risk/ Systematic Risk: Risk due to economy-wide factors affecting all investments.
Credit Risk: Risk that bond issuers or borrowers may default.
Company-specific Risk/ Unsystematic Risk: Risk tied to individual companies or securities.
Downside Risk: The potential for an investment to lose value due to negative market conditions. This focuses only on the probability and quantity of losses rather than the probability of volatility of prices. ESG investing primarily provides downside protection rather than return enhancement.
Volatility: The degree of price fluctuation in either direction in an asset or portfolio over time.
Benchmark: A standard (often an index) for comparing investment performance (e.g., Nifty 50).
Tracking Error: The difference between a portfolio’s returns and the returns of the benchmark its tracking.
Capital Gain: Profit made from selling an asset for more than it’s cost.
Dividend: Payments made by companies to shareholders, usually from profits.
Compound Interest: Earning interest on initial investment plus prior earned interest—critical for long-term growth.
Net Asset Value (NAV): Value per share of mutual funds or ETFs, calculated as total assets minus liabilities divided by shares.
Bull Market / Bear Market: Extended period of rising (bull) or falling (bear) asset prices.
Yield/ Return: Income return on investments, such as interest or dividends.
Turnover: The rate at which securities are bought/sold in a portfolio; high turnover can mean higher costs.
Sharpe Ratio: Measures risk-adjusted return, penalising for volatility.
Portfolio Optimisation: Selecting the best mix of assets to maximise returns for a given risk.
Passive/Active Management: Passive strategies track a benchmark, active invest based on analysis, not constrained to an index.
Index: A selection of securities representing a market or sector, used for performance tracking and benchmarking.
Index Risk Characteristics: How much an index’s value fluctuates due to its components; calculated via weighted average of the securities’ price changes.
Portfolio Tilting: Adjusting portfolio weights to emphasise preferred features (like ESG leaders) while maintaining diversification.
ESG Ratings/Scores: Independent evaluations of companies’ ESG performance.
Materiality: How significantly issues affect a company’s business or financial outcomes.
Greenwashing: Misleading claims of sustainability or ESG compliance by firms, especially the G part.
Greenhushing: Deliberately under-reporting or not reporting genuine environmental action.
Stakeholder: All groups affected by company actions, such as shareholders, employees, customers, suppliers, communities.

Now onto ESG investing.

What
ESG investing is a way to put money into companies while considering more than just their financial returns. The non financial factors considered are Environmental, Social, and Governance (ESG) aspects of the company.

Here’s a list of ESG laws in India.

A small list of different ESG aspects:

Environmental Factors	Social Factors	Governance Factors
Resource use, pollution, waste creation, waste disposal, sustainable procurement, biodiversity impacts,	Human rights, equality, equity, diversity, inclusion, human capital management, customer safety, customer satisfaction,	Corporate governance, executive compensation, board membership, whistleblower protection, corporate transparency, business ethics, shareholder compensation and rights, stakeholder engagement

Why
ESG investing has evolved from a niche ethical consideration to a fundamental component of modern investment strategy due to the recognition that environmental, social, and governance factors pose material financial risks that can devastate companies when left unmanaged. The core imperative for ESG investing lies not in altruism but in financial reality: companies that fail to manage ESG risks face losses that can destroy shareholder value and damage their competitive position.

Mismanaged environmental risks can result in extensive fines, settlements and other costs, stock price collapse, CEO resignations, criminal investigations, and business model restructuring.

Examples:
The Volkswagen emissions scandal: the company was charged over $30 billion in fines, settlements, and other costs after installing “defeat devices” in 11 million diesel vehicles to cheat on emissions tests.¹ The misconduct triggered an immediate stock price collapse, forced resignations, sparked criminal investigations across multiple continents, and required the company to fundamentally restructure its entire business model toward electric vehicles.

The BP Deepwater Horizon oil spill resulted in $20.8 billion in environmental damage settlements, the largest in U.S. history, plus additional billions in cleanup costs, lost revenues, and operational disruptions.² ³ The environmental damages translated directly into financial losses through fishing industry shutdowns, tourism declines, and permanent ecosystem service losses valued at $17.2 billion.⁴

Here’s an explanation of ecosystem services.

Social risks create equally devastating financial consequences when companies fail to maintain proper governance over workplace culture and employee treatment.

Examples:
The Wells Fargo cross-selling scandal, where employees created 3.5 million fraudulent accounts without customer consent, resulted in $3.7 billion in settlements and fundamentally shattered the bank’s reputation for customer-centric service.⁵ The scandal emerged from toxic sales cultures that imposed impossible quotas on employees, leading to widespread fraud, customer harm, and eventual regulatory intervention.

In 2025, Google agreed to pay $50 million to settle a lawsuit alleging bias against Black employees.⁶ Simultaneously, the company paid an additional $28 million to settle claims that it favored white and Asian employees.⁷ Adding to Google’s social risk exposure, the company faced a separate $118 million gender discrimination settlement involving approximately 15,500 employees.⁸ These combined settlements totaling $196 million (50+28+118) reflect systematic failures in Google’s workplace culture and diversity management that created material financial liabilities.

While risk management drives the primary rationale for ESG investing, additional business benefits strengthen the investment case. Better risk management reduces costly scandals and regulatory penalties, improved stakeholder relationships enhance operational resilience, and ESG practices often drive operational efficiencies that reduce costs.

Investor demand increasingly favors ESG-compliant companies, with over 90% of younger investors showing interest in sustainable investing.⁹ ESG-focused institutional investments are projected to reach $33.9 trillion by 2026,¹⁰ while 89% of investors consider ESG when making investment decisions¹¹. This demand translates into better access to capital and lower financing costs for companies with strong ESG credentials.

Regulatory momentum makes ESG compliance increasingly mandatory rather than voluntary. The European Union’s Corporate Sustainability Reporting Directive, India’s Business Responsibility and Sustainability Report framework, and similar regulations worldwide require comprehensive ESG disclosures and accountability. Companies failing to meet these requirements face market access restrictions, regulatory penalties, and competitive disadvantages.

Research demonstrates that ESG investing provides downside protection, especially during social or economic crises.¹² During the COVID-19 pandemic, companies with robust ESG practices demonstrated greater financial resilience and risk management capabilities compared to conventional peers.¹² This downside protection stems from ESG companies’ superior risk management, stakeholder relationships, and operational flexibility.

Climate-related weather events are expected to cost suppliers $1.3 trillion by 2026.¹³ Companies with strong environmental practices position themselves to avoid these costs through improved resilience, supply chain diversification, and proactive adaptation measures. This represents massive potential savings compared to companies that ignore environmental risks.

How
ESG investment strategies provide multiple pathways for investors to align their portfolios with environmental, social, and governance principles while pursuing financial returns. Understanding these distinct approaches enables investors to select methods that best match their values, risk tolerance, and impact objectives.

Negative Screening (Exclusionary Screening)
Negative screening represents the oldest and most straightforward ESG approach, systematically excluding companies or entire sectors that fail to meet specific ethical or sustainability criteria. This strategy originated in the 1970s with religious investors avoiding industries like tobacco, alcohol, gambling, and weapons manufacturing.¹⁴ ¹⁵

Modern negative screening has expanded significantly beyond traditional “sin stocks” to exclude companies with poor environmental records, human rights violations, or severe governance failures. For example, many European pension funds exclude companies involved in coal mining or controversial weapons, while Norway’s Government Pension Fund Global eliminates companies with severe environmental damage or human rights violations from its portfolio.

The screening criteria can range from broad sector exclusions to specific revenue thresholds, such as excluding companies that derive more than 10% of revenue from fossil fuel extraction. This approach allows investors to avoid supporting business activities that conflict with their values while maintaining diversification across other sectors.

Positive Screening (Best-in-Class Selection)
Positive screening takes the opposite approach by actively seeking companies that demonstrate superior ESG performance within their respective industries. This “best-in-class” methodology allows investors to maintain sector exposure while favoring companies with the strongest sustainability credentials.

Unlike negative screening, positive screening doesn’t automatically exclude controversial sectors like oil and gas or mining. Instead, it identifies companies within these industries that show the best ESG practices, commitment to improvement, and transition strategies. For instance, an oil company might qualify if it demonstrates the lowest carbon intensity, strongest safety record, and most credible renewable energy transition plan in its peer group.

BlackRock, the world’s largest asset manager, exemplifies this approach by selecting companies with the highest ESG ratings in each sector for its ESG-focused funds. The Dow Jones Sustainability Indices follow similar principles, annually selecting the top 10% of companies in each sector based on ESG criteria.¹⁶

ESG Integration
ESG integration systematically incorporates environmental, social, and governance factors into traditional investment analysis alongside financial metrics. Rather than simply screening companies in or out, this strategy uses ESG data to better understand risks, opportunities, and long-term value creation potential.

This approach recognises that ESG factors can significantly impact a company’s financial performance, competitive position, and operational resilience. Investment analysts examine how climate risks might affect a utility company’s infrastructure costs, how labor relations impact a retailer’s operational efficiency, or how board composition influences strategic decision-making quality.

Unilever demonstrates ESG integration through its Sustainable Living Plan, which focuses on environmental impact, social responsibility, and governance to reduce risk, build stakeholder trust, and deliver consistent financial performance.

Thematic Investing
Thematic investing focuses on specific ESG themes or sectors that address major global challenges while offering growth opportunities. This strategy identifies long-term sustainable trends and invests in companies positioned to benefit from these developments.

Common thematic areas include renewable energy, clean technology, water management, sustainable agriculture, healthcare access, and financial inclusion. The iShares Global Clean Energy ETF exemplifies this approach by investing specifically in companies involved in solar, wind, and other renewable energy sources.

Thematic investing differs from broad ESG approaches by concentrating on specific solutions rather than applying general ESG criteria across all sectors. This focused approach can offer higher growth potential but typically involves greater concentration risk.

Impact Investing
Impact investing seeks to generate measurable positive social or environmental outcomes alongside competitive financial returns. This approach targets specific problems and requires evidence of additionality- demonstrating that the investment creates positive change that wouldn’t occur otherwise. The Global Impact Investing Network reports that impact investing assets under management have grown to $1.6 trillion in 2024.¹⁷ ¹⁸

Impact investments often focus on underserved markets or pressing global challenges such as affordable healthcare, clean water access, financial inclusion, sustainable agriculture, and climate solutions. Examples include microfinance institutions serving underbanked populations, funds supporting affordable housing projects, and companies developing clean water solutions for developing regions. To be noted, unlike thematic investing, impact investing requires ongoing measurement and reporting of social and environmental outcomes, not just investment in relevant sectors.

Shareholder Engagement and Stewardship
Shareholder engagement uses ownership rights to influence corporate behavior and improve ESG practices through dialogue, proxy voting, and shareholder resolutions. This strategy recognises that investors can create positive change by actively engaging with companies rather than simply avoiding or divesting from problematic investments.

Engagement activities include regular dialogue with management, filing shareholder proposals, voting on proxy measures, and participating in collaborative initiatives with other investors. BlackRock reported conducting over 2,600 engagements with nearly 1,700 companies during 2019, focusing on issues like board diversity and climate risk disclosure.¹⁹

A cinematic example of ESG shareholder activism occurred in 2021 when Engine No. 1, a small hedge fund with just $40 million invested, successfully elected three directors to ExxonMobil’s board to promote climate-focused strategies.²⁰ This campaign demonstrated how strategic engagement can achieve significant influence even with modest shareholdings.

Norm-Based Screening
Norm-based screening evaluates companies based on compliance with internationally recognised standards and norms covering ESG factors. This approach screens investments according to frameworks established by organisations such as the United Nations Global Compact, OECD Guidelines for Multinational Enterprises, and International Labour Organization conventions.

Unlike values-based exclusions, norm-based screening focuses on minimum acceptable business conduct standards rather than sector preferences. Companies failing to comply with basic human rights, labour standards, environmental protections, or anti-corruption measures may be excluded regardless of their industry.

EUROFIMA exemplifies this approach by monitoring investee compliance with the Ten Principles of the UN Global Compact, derived from international human rights, labour, environmental, and anti-corruption standards. Non-compliant positions must be liquidated and business relationships terminated.²¹

Portfolio Tilting and Overweighting
Portfolio tilting adjusts portfolio weights to favour companies with higher ESG ratings while maintaining similar sector and risk characteristics to a benchmark index. This approach provides ESG exposure without dramatically altering portfolio diversification or risk profiles.

Rather than completely excluding companies or sectors, portfolio tilting reduces exposure to ESG laggards while increasing allocations to ESG leaders. A fund might replicate the Russell 3000 index structure but tilt toward companies with superior ESG scores, maintaining broad market exposure while expressing ESG preferences.

This strategy appeals to investors seeking ESG alignment without accepting significant tracking error relative to market benchmarks. The approach balances ESG considerations with traditional portfolio management objectives like diversification and risk control.

Double Materiality
Double materiality is the cornerstone of the European Union’s Corporate Sustainability Reporting Directive (CSRD). Double materiality looks at the company’s impact on the environment, which is seen in impact materiality and sustainability issues influence a company’s development, performance, and financial position, which is evaluated through financial materiality.

Choosing the Right Strategy
The selection of appropriate ESG strategies depends on individual investor priorities, risk tolerance, and desired level of impact. Many investors combine multiple approaches—using negative screening to exclude unacceptable investments while applying positive screening or ESG integration to select among remaining options.

Beginners often start with ESG mutual funds or ETFs that employ professional management and established methodologies. More sophisticated investors might combine thematic investments with shareholder engagement activities to maximise both financial returns and positive impact.

Who
Pension funds have emerged as significant drivers of ESG investment due to their long-term investment horizons and exposure to ESG-related downside risks.²² According to recent research, 71% of sovereign wealth fund respondents have adopted an ESG approach,²³ examples include Norway’s Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund at $1.3 trillion, which has become a stand-out example of responsible investing through negative screening and divestment from companies causing severe environmental damage.²⁴ Insurance companies are the third influencial group interested in the ESG investing, with 85% of global insurers believing ESG will impact all functions of their business. They identify investments as the single largest area of ESG impact, with 91% recognising significant implications.²⁵ Finally, asset management giants are the remaining very large investor: BlackRock now oversees roughly $320 billion of dedicated ESG funds,²⁶ Vanguard offers both exclusionary ESG funds that filter out certain sectors and actively managed products that allocate capital to companies with leading or improving ESG practices,²⁷ and State Street Global Advisors manages over $516 billion in ESG assets under management, comprising roughly 12.5% of the firm’s total assets under management as of 2021.²⁸

Current ESG Related Monetary Flows
The ESG fund flow landscape has experienced significant volatility in recent years. Global sustainable funds recorded the highest inflows of 2024 in the fourth quarter, reaching $16.0 billion. However, the first quarter of 2025 saw record outflows of $8.6 billion, marking the worst quarter on record.²⁹ ³⁰ The market showed signs of recovery in the second quarter of 2025 with net inflows of $4.9 billion, driven primarily by European investors who contributed $8.6 billion after redeeming $7.3 billion in the prior quarter.³¹

Global sustainable funds attracted $31 billion in net inflows during 2024, though this represented slower growth compared to previous years. The combined assets of mutual funds and ETFs investing according to ESG criteria increased by $8.43 billion to $605.23 billion in the United States alone.³² ³³

Meanwhile, Germany leads global ESG enforcement with the largest single penalty imposed on DWS (Deutsche Bank’s asset management arm), which paid €25 million ($27 million USD) in 2025 for greenwashing violations;³⁴ Australia has also demonstrated a comprehensive enforcement program with three major greenwashing penalties totaling $23.3 million USD in the last year;³⁵ ³⁶ ³⁷ United Kingdom reports £7.3 million ($7.3 million USD) in individual penalties during 2024/25, representing a 225% increase from the previous year;³⁸ and even the United States has fined $19 million across multiple actions.³⁹ ⁴⁰

Challenges and Market Evolution

The ESG landscape faces significant challenges from regulatory uncertainty and political backlash, particularly in the United States where ESG principles have become politically controversial.⁴¹
The absence of unified global ESG standards represents one of the most persistent challenges facing the sector. 25% of global investors identify inconsistency in ESG scores from different rating providers as their primary challenge, while 37% of executives highlight the lack of consistent reporting standards as a major operational obstacle.⁴² This fragmentation creates significant compliance burdens for multinational corporations. Companies operating across multiple jurisdictions must navigate the CSRD, TCFD, GRI, SASB, and ISSB standards, each with different disclosure requirements.
Columbia University and London School of Economics research comparing 147 ESG fund portfolios with 2,428 non-ESG portfolios found that companies in ESG portfolios had worse compliance records for both labor and environmental rules. These findings contribute to growing skepticism, with 53% of UK investors considering ESG factors in 2023, down from 65% in 2021.⁴³ ⁴⁴
46% of investors highlight the lack of comprehensive ESG data as a significant challenge , particularly for Scope 3 emissions and supply chain risk assessments.⁴⁵ ⁴⁶
Supply chain due diligence presents major compliance challenges, as most ESG risks occur outside an organisation’s direct operations. Companies must ensure their entire supply chain complies with ESG standards, which can be resource-intensive, particularly when dealing with suppliers in emerging markets that may lack resources or expertise to meet compliance standards.⁴⁷
There is a growing role of artificial intelligence and machine learning in ESG data collection and analysis. Technology solutions address the 46% of investors who identify lack of comprehensive ESG data as a significant challenge, representing a practical solution to implementation barriers.

In conclusion, understanding these diverse ESG investment strategies enables investors to construct portfolios that reflect their values while pursuing competitive financial returns and contributing to positive environmental, social, and/ or corporate governance changes, if they wish to do so.

ESG factors represent material business risks that directly impact financial performance, not ancillary social concerns: NYU Stern meta-analysis showing 58% positive relationships and 90% non-negative correlations between ESG performance and financial returns.⁴⁸ This positions ESG as fundamental risk management rather than values-based investing overlay. Therefore, companies that excel at managing these risks demonstrate superior long-term value creation, while those that ignore ESG factors face potentially catastrophic financial losses that can destroy decades of shareholder value.

Sources

Share this:

Share this: