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Four Types of ESG Strategies for Investors

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ESG Strategies

ESG Strategies

This infographic is available as a poster.

Four Types of ESG Strategies for Investors

In recent years, sustainable investment strategies have shown a number of benefits for investors, from resilience in market downturns to share outperformance in the long-term.

Meanwhile, investor interest has skyrocketed—with environmental, social, and governance (ESG) indexes advancing 40% between 2019 and 2020 alone. Given the increased demand for green investments, investors have an ever-expanding list of options to choose from. But what ESG approach is the right fit for you?

To answer this question, this Markets in a Minute chart from New York Life Investments looks at the primary strategies used in ESG investing to help investors choose the approach that works best for their portfolio.

What Kind of Investor are You?

Broadly speaking, there are four main approaches to ESG investing: ESG integration, exclusionary investing, inclusionary investing, and impact investing.

1. ESG Integration

“I want to integrate ESG factors and traditional factors to assess the risk/reward profile of my investment.”

For example, using an ESG integration approach, a company’s water usage and toxic emissions would be assessed against financial factors to analyze any future risks or investment opportunities.

2. Exclusionary Investing

“I want to screen out controversial companies or sectors that do not meet my sustainability criteria.”

Using an exclusionary investing approach, an investor may screen out companies whose revenues are from tobacco, gambling, or fossil fuels.

Related ESG Terms:

  • Negative Screening
  • Negative Selection
  • Socially Responsible Investing (SRI)

3. Inclusionary Investing

“I want to seek out companies that are ranked highly in their sector based on sustainability criteria.”

With an inclusionary approach, a fund may include the leading companies in a sector, relative to their peers, such as the top performing tech companies in ESG.

Related ESG Terms:

  • Positive Screening
  • Positive Selection
  • Best-In-Class
  • Positive Tilt
  • Thematic Investing

4. Impact Investing

“I want to invest in companies that attempt to deliver a measurable social and/or environmental impact alongside financial returns.”

Lastly, impact investing approaches may focus specifically on renewable energy companies that have the intent to make a positive environmental impact.

Related ESG Terms:

  • Goal-Based Investing
  • Thematic Investing

ESG Investing Strategies, By Market

How does interest in ESG strategies vary according to geographical region? Overall, interest has increased across all regions globally (where data was available).

Interest in ESG By Market*20182020
India98%100%
Mainland China95%98%
UAE90%94%
MexicoN/A92%
France79%91%
Brazil82%90%
JapanN/A88%
Hong Kong, SAR China71%86%
South AfricaN/A83%
Germany64%81%
Singapore77%78%
United Kingdom51%77%
Canada49%68%
Australia49%65%
U.S.49%57%

*With interest in these strategies and already employing them
Source: CFA Institute (Dec, 2020)

At the top was India, where 100% of respondents expressed interest or were already using ESG strategies—up from 96% in 2018.

In fact, India developed National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business as far back as 2011. This was designed as a guideline for responsible business conduct, which later aligned to the UN Sustainable Development Goals in 2016.

Following closely behind were investors in China (98%) and UAE (94%).

By contrast, 57% of investors in the U.S. employed ESG strategies—the lowest among geographic regions. Despite this, in the last two years, this figure jumped 8%, and it may rise higher yet given U.S. president Joe Biden’s new climate priorities. Electric grid and clean energy, decarbonization, and electric vehicle incentives all fall under a massive $2 trillion infrastructure plan, which will likely have a significant impact on the dialogue surrounding ESG.

Going Green

As the global drive for ESG investment continues to rise, investors can harness a greater understanding of different ESG strategies to meet their personal objectives—whether it is risk/reward analysis, seeking out ESG top performers, or a measurable environmental impact.

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Markets in a Minute

Explainer: A Visual Introduction to Fed Tapering

Broadly speaking, Fed tapering is the reversal of quantitative easing. We show the history of Federal Reserve bond tapering and how it works.

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Fed Tapering

Explainer: A Visual Introduction to Fed Tapering

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The Federal Reserve began tapering its large-scale asset purchases in November 2021, a move likely influenced by:

  • Rising inflation
  • Improving unemployment
  • Strong U.S. GDP growth

More than $4 trillion in capital was injected into the economy through quantitative easing (QE), over the course of the pandemic, inflation is at 40-year highs, and unemployment levels hover below 4%.

As Fed policy responds to a recovering U.S. economy, this Markets in a Minute chart from New York Life Investments shows how Fed tapering works, and its impact on the economy.

How Fed Tapering Works

Fed tapering is the unwinding of the Federal Reserve’s large-scale asset purchases.

After the 2008 financial crisis, large scale asset purchases were introduced for the first time to inject liquidity into the market and help restore confidence. During the pandemic, they were introduced once more, at a rate of $120 billion per month.

Here’s how it works:

  1. The U.S. central bank buys government bonds typically in the form of Treasuries and mortgage-backed securities (MBS).
  2. This influx of demand leads to a rise in these bond prices and their yields (interest rates) fall.
  3. As this lowers the interest rate on the government bonds, what often follows is lower interest rates on loans for households and businesses.
  4. Lower rates stimulate spending.
  5. When the economy is running well, the bank may unwind asset purchases to help keep inflation low, otherwise known as Fed tapering.
  6. Notably, Fed tapering and QE is hotly debated among economists. Those in favor say QE is a critical tool for stimulating the economy. Those against say that it inflates asset prices and contributes to inequality.

    Inflation Levels

    The consumer price index (CPI) rose 7% in December, the highest rise since 1982.
    Fed Tapering

    Given this increase, Lawrence Summers, former U.S. Treasury Secretary and Jason Furman, former chief economist for President Obama say that the Fed didn’t taper soon enough. Other financial heavyweights suggest this is just the beginning of a hawkish approach to inflation.

    So how does Fed tapering impact inflation?

    By tapering asset purchases, the amount of money circulating in the economy that can be used to borrow to buy a house or car is reduced. According to this theory, when there is less spending, inflation will gradually cool down.

    Fed Tapering and Interest Rates

    The Federal Reserve has outlined that it will taper asset purchases before it increases targets on short-term interest rates. By current estimates, interest rates could rise in March.

    However, if the pandemic takes a turn for the worse, the Federal Reserve can shift direction. This gives the Fed time to assess how the market and economy will react before it raises rates.

    To prevent the taper tantrum of 2013, which led to market volatility and U.S. dollar appreciation, Federal Reserve chair Jerome Powell has stated that the Fed must carefully communicate the sequence of QE and tapering to prevent any fear in the market.

    When Doves Cry

    Like the 1940s, the rise in money growth over the pandemic has been driven by government deficits. By contrast, leading up to the 2008 Global Financial Crisis or during the 1950s and 60s, the private sector spurred loan growth.

    Monetary inflation can impact consumer prices and financial asset inflation.

    As CPI and financial markets have soared over the pandemic, investors will be watching closely to see how Fed tapering impacts future monetary policy.

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Markets in a Minute

Ranked: Real Estate Returns by Property Sector (2012-2021)

From residential to retail, are there patterns in real estate return on investment? We rank them by sector over the last decade to find out.

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Real Estate Return on Investment by Sector

For the ninth year in a row, Americans say real estate is the best long-term investment.

However, what might be less clear to the average investor are the different types of investments available within the real estate sector, and how they compare. Real estate return on investment within property sectors has historically been uneven, and 2021 was no exception. While residential property soared, office real estate has performed relatively poorly.

Are there any patterns in the top performers over time?

This Markets in a Minute from New York Life Investments ranks real estate return on investment by sector over the last decade.

Sector Returns Over Time

We used data from the National Association of Real Estate Investment Trusts to show real estate return on investment by year. A real estate investment trust is a company that owns, operates, or finances income-producing real estate.

Here’s how total returns stack up by property sector, sorted from highest to lowest return in 2021.

 2012201320142015201620172018201920202021
Self Storage19.9%9.5%31.4%40.7%-8.1%3.7%2.9%13.7%12.9%57.6%
Residential6.9%-5.4%40.0%17.1%4.5%6.6%3.1%30.9%-10.7%45.8%
Industrial31.3%7.4%21.0%2.6%30.7%20.6%-2.5%48.7%12.2%45.4%
Retail26.7%1.9%27.6%4.6%1.0%-4.8%-5.0%10.7%-25.2%41.9%
Diversified12.2%4.3%27.2%-0.5%10.3%-0.1%-12.5%24.1%-21.8%20.5%
Infrastructure29.9%4.8%20.2%3.7%10.0%35.4%7.0%42.0%7.3%18.6%
Timber37.1%7.9%8.6%-7.0%8.3%21.9%-32.0%42.0%10.3%16.4%
Mortgage19.9%-2.0%17.9%-8.9%22.9%19.8%-2.5%21.3%-18.8%14.7%
Office14.2%5.6%25.9%0.3%13.2%5.3%-14.5%31.4%-18.4%13.4%
Healthcare20.4%-7.1%33.3%-7.3%6.4%0.9%7.6%21.2%-9.9%7.7%
Lodging/Resorts12.5%27.2%32.5%-24.4%24.3%7.2%-12.8%15.7%-23.6%6.3%

Data for 2021 is as of November 30. Specialty and data center sectors are excluded as this data was only available from 2015 onwards.

Self Storage real estate was the best performing sector for the last two years, and also performed well during the 2015 market correction. It tends to perform well when people’s lives are disrupted, such as when they’re moving for a new job, schooling, or due to marriage or divorce. In the case of COVID-19, self storage got an extra boost from people wanting more space in their home amid remote work.

Timber and Industrial real estate have been in the top three performing sectors for at least half of the last decade. Industrial real estate, a category including properties that enable the production, storage, and distribution of goods, has seen increased demand due to the rise of e-commerce. One estimate says the U.S. could require an extra billion square feet of warehouse space by 2025.

On the other hand, the Lodging/Resort sector has frequently been one of the bottom performers. A form of discretionary spending, hotel stays may be one of the first expenses people cut when the economy is in a downturn. This weakness was compounded by lockdown restrictions during the COVID-19 pandemic.

What is a Good Return on Investment in Real Estate?

In light of the above data, investors may be wondering which sectors are “the best” to invest in.

The short answer: it depends. Here’s how real estate return on investment has varied within sectors, using the minimum, median, and maximum returns. We’ve sorted the data from the highest to lowest standard deviation, a measure of risk.

Real Estate Return on Investment

While Timber and Self Storage have delivered strong returns, they have also been relatively risky, with some of the widest variations in returns.

Industrials have seen the highest median return, and their risk is about middle of the pack. The second highest median return goes to the Mortgage sector, which earns income from the interest on mortgages and mortgage-backed securities. The mortgage sector has seen less risk than most other real estate categories, at least in the last decade.

For investors with a lower risk tolerance, Infrastructure may be a sector to consider. These properties had a positive return on investment for all of the last 10 years, and had the lowest risk of any property sector.

Patterns Within Real Estate Return on Investment

By looking at historical patterns, investors can consider how economic conditions may affect real estate return on investment.

Sectors associated with discretionary spending, such as Retail and Lodging, have tended to perform poorly during downturns. On the other hand, Self Storage and Residential properties have historically been more resilient during the 2015 selloff and the COVID-19 pandemic.

Future trends may also offer food for thought. For example, as the population ages and the government puts an increased focus on critical facilities, could the Healthcare and Infrastructure sectors be poised for growth?

Whichever sector(s) an investor focuses in on, real estate serves as an alternative investment that can help diversify any portfolio.

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