Tag Archives: ESG Due Diligence


ESG investing has, of late, emerged as one of the most crucial sustainable investing solutions that is fast changing the financial markets. The elements of environment, society, and governance are considered by ESG elements and investors in investment decisions to create a sustainable future and gain better returns on money. It’s a strategy towards responsible investment that includes a company depending on their environment, their social responsibilities, and governance practices. The article covers growth factors, impact, and various strategies related to ESG investing. This thereby gives its importance and profitability relating to ESG investing in the US and European markets.

How to Engage in ESG Investing

Negative Screening

Negative screening is where companies or sectors whose activities or mode of operation bring damage to the environment or society, or raise ethical concerns, are excluded. For example, a company dealing in tobacco products and arms manufacture would, by default, compulsorily be outside an ESG investor’s investable universe. In another way, this means that using this approach, investments would align as best possible where investor values and ethical standards will be taken into consideration.

Positive Screening

Positive screening invests in those firms that seem to have better ESG performance or taken huge steps toward sustainability. A fund should look out for companies that clean up the environment or society. For example, an ESG investor can invest in companies that deal in clean energy, such as Tesla which designs and manufactures electric vehicles and other sustainable renewable energy products.

ESG Index Investing

ESG index investing strategies involve tracking one of the many available indices created by firms with desirable ESG practices. A host of ESG indices are used to preselect and select companies to comply with ESG criteria. For instance, a real estate investor can take an investment in the Vanguard ESG U.S. Stock ETF, which tracks the index of the FTSE US All Cap Choice to get to companies with exposure to the U. S. marketplace and high ESG performance.

ESG Exchange-Traded Funds (ETFs)

ESG ETFs are investment funds that track ESG-based indices or a basket of firms. They provide convenience and liquidity for investors to maintain a diversified pool of ESG-compliant assets. For example, iShares MSCI ACWI ESG Universal ETF is an index fund with wide coverage of firms that depict leading ESG practices.

Green Bonds

Green bonds are fixed-income investments designed to fund projects in the cause of the environment. They are mostly issued by governments, municipalities, or even corporations to develop renewable energy, clean transport, or even sustainable infrastructure projects. For example, the State of California has green bonds for setting up new solar energy projects, hence providing an investor with an opportunity to earn interest through investment in a clean energy initiative.

Impact Investing

Impact investing is an investment that generates measurable positive social or environmental impact, alongside financial return. Investors seek opportunities reflecting their values and specifically designed to meet such challenges as affordably priced housing opportunities or projects in clean energy.

Effective ESG Investing Strategies

ESG Investing Strategies

ESG Investing Strategies

Conducting Thorough Due Diligence

The most important factor is due diligence. For that matter, an investor needs to take proper assessment of the ESG practice by a company, all the way from environmental impacts to social sway and governance structures. They include carbon emissions, labor practices, board diversity, and ethics of doing business.

Engagement with Companies

The other major strategy concerning successful ESG investing is the concept of active engagement with companies. As an investor, one needs to engage deeply in the whole discourse of company affairs by discussing company management and advocating for improvements in ESG performance, analyzing trends over time. Often, this process surfaces meaningfully as improvements in corporate behaviors that enhance long-term values.

Diversifying ESG Investments

Diversification is a huge part of ESG investing and risk management. ESG portfolios should contain sector, region, or asset class diversification. This reduces exposure to a specific industry or geographic area, minimizing the potential risk related to industry-specific or geographic area-specific sectors and maximizing returns.

Measuring and Reporting ESG Performance

Investors should, therefore, be in a position to measure and report on the ESG performance of their portfolios. It directly follows that they have to measure the impacts of their ESG investments by specific metrics and frameworks previously set. Proper reporting is a critical tool for transparency and accountability and will draw more investors into sustainable finance.

Impact of ESG Investing

Impact of ESG Investing

Impact of ESG Investing

Driving Investment in Sustainable Technologies

Funds significantly drive investment in clean energy and other sustainable technologies. Global Sustainable Investment Alliance records that global sustainable investment assets are positioning themselves in the area of clean energy to be at a record USD 8.7 trillion in 2022 alone. Inflows of such huge capital should be quite critical to the development and deployment of technologies for solving environmental problems.

Lower Greenhouse Gas Emissions at Corporates

ESG investing supports a low-carbon world by reducing greenhouse gas emissions of companies. Another case in point is how the number of companies that set science-based emission reduction targets under the Carbon Disclosure Project increased from just 200 in 2015 to over 2,500 companies in 2022—indicating that corporations are rapidly getting more serious regarding operating activities in parallel with the global climate objectives.

Improving Corporate Diversity and Inclusion

It has even made corporate diversity and inclusion better, as the 2022 World Economic Forum noted, wherein companies with gender diversity increased from 10% in 2015 to 50%. Changes to embrace more inclusive companies result in enhanced corporate culture and potential for better business performance.

The Future of ESG Investing

Increased Regulatory Backing

Finally, it has even made corporate diversity and inclusion better because, as noted by the World Economic Forum, the companies having gender diversity increased to 50% in 2022 from 10% recorded in 2015. Its changes to embrace these more inclusive companies come with enhanced corporate culture and the potential for superior business performance.

Technological Advancements

The future will be powered by technological innovation—including AI and big data analytics. Both technologies can enormously make possible the capacity to evaluate ESG factors, detect investment opportunities, and monitor performance. For instance, AI is capable of reading huge amounts of data for companies with leading ESG practices or even just raising flags where there are likely risks.

Rising Choices in ESG Investments

It will remain the case that investors continue to require an exceptionally wide choice of responsible investment products if they are to have the means of tailoring portfolios in line with their own values. A huge number of new ESG-specific funds and ETFs, and impact investing green bond issues, come to market to cater for an exceptionally wide and diverse range of investor preference and priority.

Lower Earnings with Enhanced Transparency

As interest in ESG investing continues to grow, firms can expect to be held accountable for their environmental, social, and governance practices to an even larger degree. In a similar way, this pressure from the investor community, regulators, and the general public has increased with respect to better performance and transparent performance in ESG by companies.

Magistral Consulting’s Services

Develop comprehensive ESG strategy

Magistral Consulting comes with deep experience in the development of comprehensive ESG strategies and objectives corresponding to what the companies want from their operations. This would involve mapping the present landscape in ESG and areas of key focus for betterment, then formulation of action plans fitted within goals of sustainability set by the clients. It will be designed in its approach so as to ensure companies are in a position to embed ESG policies right at the core of their business operations, bidding to attain excellently performing companies that sustain their reputation as well.

ESG Performance Measurement and Reporting

Magistral Consulting offers high-end tools and methodologies for properly measuring and reporting ESG performance to its clientele. Although the company customizes the ESG metrics and reporting framework for each client, it shall definitely be based on global standards that provide transparency and accountability. This service will help trace a client’s progress and commitment to sustainability while erasing doubts for ESG-focused investors.

Identification and Management of ESG Risks

Magistral Consulting identifies and mitigates the risks associated with ESG. At the core of its very highly specialized team are in-depth risk assessments exercised through three big factors that may, if not controlled, turn into a potential threat to an entity. It is ensured by the design of effective strategies in managing such risks that their investments go well-protected from vulnerabilities and thus give long-term growth assurance.

ESG Investment Advisory Services

Magistral Consulting provides strategic advisory services to clients for making decisions that have deeply ingrained knowledge of the ESG investment landscape. It provides insight into the latest emerging trends, opportunities, and hurdles by advising on how to create a diversified, resilient, and high-performance ESG portfolio.

About Magistral Consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates, and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management, and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The article is authored by the Marketing Department of Magistral Consulting. For any business inquiries, you can reach out to prabhash.choudhary@magistralconsulting.com

ESG investing simply incorporates aspects of the environment, social, and governance into any financial investment decision-making process. This trend takes into consideration not just a better future but increased financial gain as an effect of the impact a firm holds on the environment, social, and practices in governance.

This growth would depend on increasing demand from investors, the improved financial performance of ESG-compliant companies, and government policy. Indeed, sustainability practices surely build up long-term benefits considered accruable by investors.

ESG investing sends strong capital to sustainable technologies; it reduces the corporate greenhouse gas emission, enhances corporate diversity and inclusion; it has better performance compared to traditional funds. Increasingly, companies are adopting ESG with the aim of attracting ESG-focused investors, reducing risks and enhancing their reputation.

Other common strategies include negative screening, avoiding companies engaged in harmful sectors; positive filtering into companies with top ESG practices; index investing in ESG-oriented indices; investment funds, namely, the ESG ETFs, also tracking ESG indices; Green Bonds, whose proceeds are used for projects with less adverse environmental impact, and Impact Investing in projects that have directly measurable positive social or environmental impacts.

Indeed, impetus regulatory incentives have been on the rise along with technological greatness, raising investment options, and corporate accountability, slowly but progressively tightening the disclosure requirement—governments do what they shall do, with the related incentives already on their way. As far as technology is concerned, technologies such as AI, big data, and others further provide support for active enrichment of these technologies in updated ESG appraisals.

ESG investing is one of the fastest-growing trends in the investment world. Asset Managers are moving towards ESG investing at a great pace, not only due to regulatory compliance requirements but also because ESG investing has been proven to show better returns and alpha in the past.

What is ESG investing?

ESG stands for Environmental, Social, and Governance and ESG investing relates to evaluating these parameters while analyzing a potential investment.

ESG which was a niche investing technique only a few years back is now the centerpiece of the majority of the investments being evaluated globally. ESG investing trend has seen a massive uptick. The global market for ESG touched $30.7 trillion in 2018 representing a growth of 34% over 2016. It is expected to touch $35 trillion by 2020. The global coronavirus pandemic of 2020 will give further fillip to this trend. Multiple ESG funds, that specialize in ESG based investments is a common theme now

Why is ESG investing important?

ESG specifically touches on some aspects of investments, that are proven to generate superior returns in the past. Investments that are evaluated properly on ESG metrics are more resilient to inherent business risks. ESG investment performance has been better than other investments. Even ESG ETF has shown better performance compared to peers.

ESG of course is the only sustainable way of investing to ensure that the planet we live on, is not distorted and polluted beyond repair and probably the only strategy that could guarantee a really long term performance

Here is a typical example of how ESG could play a vital role in assessing the reliability of the ESG investment in companies

Environmental Factors

Here the relevant factors are resource use, emissions, environmental opportunities, pollution, waste, green supply chain, carbon footprints, and everything else touching the environmental aspects that a given industry, or a company operates in. If a firm is on the wrong side of the environmental side, there could be an enhanced risk of running into bans and penalties, all of which poses a long-term bottom-line impact.

Social Factors

Here the factors relate to society, people, and the workforce in general. The relevant factors here would be Workforce, Social Opportunities, Data Privacy, and Product Responsibility. Social factors are the most important factor for any people-based business. If the “people” part of the business is taken care of, it’s imperative that investments would generate desirable returns in the future, because “people” forms the most important lever for the business profitability

Governance Factors

Governance includes factors like Risk Responsibility, shareholder rights, and CSR initiatives. It is the ability of the management to discharge its fiduciary responsibilities towards the investors. History is full of examples like Enron where Governance made the difference between success and failure. Governance is at the heart of trusting the financial performance and documents related to an investment.

Hence it’s evident that ESG investment for funds like Hedge Funds, Private Equity, Venture Capital Mutual Funds, and ESG Bonds may lead to superior alpha

So, ESG aspects need to be analyzed in detail before making an investment decision.

ESG across the investment value chain

ESG analysis framework for investments for asset management plays its role across the full value chain of investing. Here is how ESG aspects need to be analyzed across the investing value chain so that ESG risk is minimized

ESG across investment value chain

ESG across the investment value chain of companies

Deal Origination

ESG has to play a significant role in the deal origination stage itself. All the deals that are in the pipeline need to go through a quick and dirty assessment of ESG. Here the key is to have the relative comparison across opportunities and still not diving too deep into the evaluation. Also, care needs to be taken to identify the investments that have painted themselves as ESG investments, without following the principals in essence.

Due Diligence

At the stage of Due diligence, the quick and dirty analysis changes into a detailed one. Here the second level of data is collected. Also involved in the process are ESG specialists, data and reporting specialists, and the business experts to have a holistic view of the ESG preparedness of the investment. Also during Deal execution, while arriving at the valuation of the opportunity, the analyst needs to assign the relevant weights to the ESG related red flags and advantages. A benchmark with available ESG standards from ESG rating agencies is performed. A detailed ESG questionnaire is also prepared for the due diligence.

Portfolio Management

ESG plays out even after the investment decision. The portfolio needs to be continually monitored for ESG related red flags, violations, and the efforts made and required in the ESG direction. A centralized Project Management Office for ESG efforts of all portfolio companies goes a long way in establishing common standards across all portfolio companies. ESG policy compliance and ESG disclosure norms are also monitored and managed.

Reporting and Compliance

ESG reporting and compliance standards are still evolving. Europe particularly has taken a lead in ESG compliance over the US and APAC. It’s a matter of time that other geographies also catch up. Even Europe’s standards are not detailed to the second and the third level. This is expected to change in the future. Standards like GRI, SASB, TCFD, and several others across geographies need expert intervention for compliance.

Challenges related to ESG data collection

There are multiple challenges related to the data collection process when it comes to ESG. Here are the major challenges

ESG Data Challenges

ESG Data Challenges and Solutions








Data is not scalable: Due to the patchy nature of data available across the investment avenues, there are limited options for streamlining and scaling up the data operations.

Customized Data Requirements: Every Asset Manager has a different ESG mandate and there is no one size fits all approach to data collection. Every data collection exercise needs to be customized to effectively capture information that serves the investment mandate

Voluntary reporting: Though compliance standards are evolving, still most data reporting is voluntary. This presents challenges in evaluating and comparing data points across investment avenues.

Incomplete Data: Data many a time is incomplete and there is a huge dependency on proxy information to complete the picture

Incomparable formats: The available data are spread across geographies and varying reporting standards. It presents challenges in comparing the data points across multiple investment options

Lack of reliable sources: There are some sources for ESG data and ESG index but there is none that is fully reliable. Hence there is a need to depend on multiple sources to complete the picture of ESG evaluation

A solution to the Challenges

Magistral Consulting offers a full suite of data services when it comes to ESG data collection, treatment, and presentation. Magistral relies on ESG experts along with data research and visualization experts to present a holistic picture. AI and automation tools further reduce the cost of data collection. All the solutions are customized as per the needs of Asset Managers so that the solution helps the Asset Manager in achieving a superior alpha. ESG research is performed by experienced ESG analysts

The unique advantages of Magistral’s solutions are ESG operations cost reduction, and the panel of experts on ESG, SME, ESG consultants, and Investment Research

Magistral’s ESG Services Framework

Magistral follows a customizable plan to offer ESG data services.

ESG Framework

Magistral’s proprietary framework for ESG evaluations








Here are the major aspects of the framework:

Data Collection: The key is to access as many data sources as possible about the ESG stock. Even when the complete data is not available, opinions, insights, and experts’ views help. ESG investing criteria is crystallized

Alignment with the mandate: Although a wide array of ESG data is collected but not all data points may be relevant for the ESG investing for the Asset Manager. In this stage, data is aligned with the investment objective, investment philosophy, or the investment mandate. This is where the views of Asset Managers are built into the process. ESG investing strategies of the Asset Manager is also built-in.

Modeling: All customizable aspects are built into the model so that investment avenues could be objectively compared and evaluated. ESG ratings or ESG score are arrived at, in this stage

Reporting: Reporting could be done through customized tools like web-based distribution, excel models, or cloud sharing tools. Effective visualization for ESG metrics is incorporated to pass on the right messages.

Magistral Consulting has helped Hedge Funds, Bonds, Private Equity, Investment Banks, Mutual Funds, ETFs, and Venture Capital in analyzing ESG aspects of investments across the globe

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family OfficesInvestment BanksAsset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE fundsCorporates and Portfolio companies. Its functional expertise is around Deal originationDeal Execution, Due Diligence, Financial ModelingPortfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.