Table Of ContentResponsible Investing
Responsible Investing serves as a holistic resource on Environmental, Social, and Governance (ESG)
investing for undergraduate and graduate programs. It provides a thorough background and history
of ESG investing, as well as cutting-edge industry developments, introducing the reader to the
rapidly evolving field of responsible investing.
Building on the first edition, this second edition provides updates where appropriate, as well
as new emphasis on the development of standards in terminology and metrics. Opening with
the background of ESG investing, the book discusses the development of ESG risks and provides
an overview of ESG rating systems. It outlines the current position of ESG investing in portfolio
management through granular analysis, offers insight into common investor concerns about
ESG investments, presents qualitative theories, and reviews literature modeling ESG investment
performance. Finally, the authors provide readers with a foundation on the development of
financial models measuring risk and return, which can be used to evaluate the performance of ESG
investments. This edition features updated statistics and a new chapter on regulation, reporting, and
taxonomy in ESG investing, as well as new international case studies.
Following a summary approach, Responsible Investing is a valuable textbook, providing a context in
which upper-level students of ESG investment and sustainable finance can specialize.
Matthew W. Sherwood, Ph.D., is Chief Executive Officer at WeVidIt Media, Inc. He is also an
appointed Fellow in Business and Finance, an adjunct faculty member at The King’s College, and
a guest lecturer at Columbia University, where he lectures on ESG Investing. Sherwood is also
Investment Committee Member for both the Lavelle Foundation and the Guide Dog Foundation &
America’s Vet Dogs.
Julia Pollard is Product Manager covering Emerging Market Debt strategies at AllianceBernstein
(AB). Pollard recently published “Establishing ESG as Risk Premia,” which was published in 2018
in the Journal of Investment Management and “The Risk Adjusted Return Potential of Integrating ESG
Strategies into Emerging Market Equities,” which was published in 2017 in the Journal of Sustainable
Finance and Investments.
Responsible Investing
Second Edition
Matthew W. Sherwood
and Julia Pollard
Designed cover image: NicolasMcComber/Getty Images
Second edition published 2023
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2023 Matthew W. Sherwood and Julia Pollard
The right of Matthew W. Sherwood and Julia Pollard to be identified as authors
of this work has been asserted in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from the
publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent
to infringe.
First edition published by Routledge 2019
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Sherwood, Matthew W., 1983- author. | Pollard, Julia, 1995- author.
Title: Responsible investing / Matthew W. Sherwood, Ph.D. and Julia Pollard.
Description: Second edition. | Milton Park, Abingdon, Oxon ; New York, NY :
Routledge, 2023. | Includes bibliographical references and index.
Subjects: LCSH: Investments—Social aspects. | Portfolio management.
Classification: LCC HG4515.13 .S34 2023 | DDC 332.6—dc23/eng/20221114
LC record available at https://lccn.loc.gov/2022054345
ISBN: 978-1-032-10103-3 (hbk)
ISBN: 978-1-032-10097-5 (pbk)
ISBN: 978-1-003-21366-6 (ebk)
DOI: 10.4324/9781003213666
Typeset in Joanna
by Apex CoVantage, LLC
Contents
List of figures ix
List of tables xi
About the authors xiii
Contributors xv
Preface xvii
Acknowledgments xix
Chapter rubrics xxi
1 Introduction 1
1.1 Assumptions for this textbook 1
1.2 Terminology 2
1.3 Useful features for students 3
Discussion questions 3
2 A historical survey of ESG investing 4
2.1 Progression of investing theories: neoclassical economics encounters
human nature 4
2.2 Socially responsible investing’s historical beginnings: religious and
corporate development (1800s–1950s) 5
2.3 Development era: key milestones in the development of SRI investing
(1950s–1990s) 8
Case study 2A Pilgrims Fund Board 9
2.4 The modern era: 1990s–today 12
Learning perspective 1 Handprinting: driving positive impacts 17
Discussion questions 26
3 Common methods for incorporating ESG investments into
portfolio management 30
3.1 Exclusion-based ESG investing 30
3.2 Integration-based ESG investing 32
Case study 3A ESG integration at J.P. Morgan Asset Management 34
3.3 Impact-based ESG investing 41
3.4 Engagement-based ESG investing 42
Case study 3B Defining engagement – Federated Hermes 43
Learning perspective 2 ESG proxy voting 51
Discussion questions 64
4 The development of ESG risk and the ESG rating system 66
4.1 Introduction to ESG risks 66
4.2 Policy risk 66
4.3 Headline risk 68
vi | ConTEnTS
4.4 Performance risk 69
4.5 Introduction to risk premia 69
4.6 ESG identification and the ESG rating system 72
Case study 4A MSCI ESG ratings 73
Case study 4B Sustainalytics 74
4.7 The impact of ESG risk on portfolio management 78
Learning perspective 3 How ESG indexes facilitate the evolution of finance 80
Discussion questions 91
5 Regulation, reporting, and taxonomy in ESG investing 95
5.1 Necessity of precise responsible investing terminology 95
Case study 5A Sustainable Development Goals 100
Case study 5B Mexico SDG-linked bond 103
5.2 Evolution of responsible investing terminology 104
5.3 ESG-related regulation 107
Case study 5C EU Sustainable Financial Disclosure Regulation 108
5.4 Developments in ESG-related data and reporting 109
Discussion questions 110
6 The impact of common investment theories on ESG investment trends 112
6.1 Shareholder theory vs. stakeholder theory 113
Case study 6A Dodge v. Ford Motor Co. (judicial foundation for
shareholder theory) 114
6.2 Material information vs. non-material information 117
Case Study 6B Securities and Exchange Commission 17 CFR PARTS 211,
231 and 241 [release nos. 33–9106; 34–61469; FR-82] commission
guidance regarding disclosure related to climate change 117
6.3 Resource-based view vs. Porter’s five forces model 119
6.4 Universal owner theory 121
Discussion questions 121
7 The current role of ESG investing in portfolio management 123
7.1 ESG investing in developed markets 126
Case study 7A Breckinridge Capital Advisors 129
7.2 ESG investing in emerging markets 133
Case study 7B Hot topic: fossil fuel-free (FFF) investment 134
Case study 7C SRI investing within hedge funds 135
Discussion questions 141
8 Common investor concerns regarding ESG investment strategies 143
8.1 Return concerns 144
Case study 8A Passively customized ESG indices by Aperio (BlackRock) 145
8.2 Policy concerns 151
8.3 Information concerns 151
Case study 8B Customized responsible investment policies to evaluate
investment products – a case study from Germany 152
8.4 Regional concerns 160
Learning perspective 4 Sustainability and financial performance 161
Discussion questions 168
ConTEnTS | vii
9 Commonly held ESG views and practical considerations 174
9.1 Qualitative vs. quantitative models 175
9.2 Environmentally focused investing 176
9.3 Socially focused investing 180
9.4 Governance-focused investing 181
Learning perspective 5 The future of capitalism is feminine 185
Discussion questions 192
10 Methods for modeling risk and return for traditional investments 196
10.1 Fundamental analysis 197
Case study 10A Integrating ESG in DCF valuation: AllianceBernstein’s
Global Core Equity 198
10.2 Quantitative analysis 202
10.3 Development of common method of risk and return 206
Discussion questions 209
Index 211
Figures
2.1 Socially responsible investment assets by region 15
2.2 Handprinting spheres of influence 23
3.1 Developed market fundamental equities areas of ESG consideration 37
3.2 Federated Hermes thematic approach to engagement objectives 44
3.3 Dynamics of EOS at Federated Hermes engagement process 46
3.4 Federated Hermes responsible investing platform 48
3.5 Climate change shareholder resolutions since 2010 55
3.6 Resolutions filed on corporate political activity 58
3.7 Decent work proposals since 2010 60
3.8 Workplace diversity proposals since 2010 61
3.9 Proposals on sustainable governance since 2010 61
3.10 Sustainability reporting resolutions since 2010 62
3.11 Conservative proposals filed since 2010 63
5.1 EU Taxonomy: Six Environmental Objectives 105
5.2 EU Taxonomy: Substantial Contributions and Conditions 106
5.3 Sustainable Financial Disclosure Requirements (SFDR) Classifications 109
7.1 Growth of ESG Assets by Region 2016–2020 124
7.2 Proportion of socially responsible investments (SRI) relative to total
managed assets 124
7.3 ESG integration methodology 131
7.4 Breckinridge engagement priorities 133
7.5 Investment time horizons 136
7.6 Number of hedge fund signatories 139
7.7 Number of signatories 139
8.1 Tracking error in social scores 149
10.1 Skewness relative to normal distribution 205
10.2 A view of kurtosis 206
