Investors who apply exclusions remove issuers from their portfolios based on certain products or services, an industry, or corporate behaviors, like major controversies.

Product Involvement metrics measure a company’s involvement in a range of products, services and business activities, based on revenue exposure. Morningstar Sustainalytics covers 33 areas of involvement, including alcoholic beverages, animal testing, controversial weapons, gambling, genetically modified plants and seeds, nuclear, small arms and thermal coal.

By monitoring and analyzing news and other sources, controversies research builds a comprehensive picture of the ESG incidents a company or industry is facing. Controversies research also quantifies risk, judging severity according to impact, as well as the strength of management's response.

Investors who limit ESG risk use ratings to understand a company’s exposure to certain material ESG issues. Sustainalytics calculates its ratings using baskets of measures that vary by sub industry. For instance, ESG risks in the utilities industry reflect the importance of its carbon footprint, governance and ethics, community relations, and emissions and waste. A fuller discussion of the ratings methodology can be found here.

Investors who use ESG information to seek opportunities apply data to identify companies that are sustainability leaders. Investors seeking emerging opportunities can find them in the private-capital markets. According to PitchBook, private market fund managers raised $1.3 trillion in 2021. Venture capital accounted for $242 billion of this.

Over the past ten years, the number of private-market active investors has tripled, as access to the market has broadened beyond institutional and high net-worth buyers. Some private equity firms have slashed minimum investment requirements for their funds. Others are building investment vehicles for the 401(k) market following Department of Labor guidance in 2020 that effectively allows companies to include managed private-equity funds in 401(k) plans.

The private markets can also provide direction about future opportunities in the public markets, as private firms get acquired or go public.

Investors who practice active ownership engage with companies to influence sustainability-related policy. Retail investors most often participate indirectly, through asset managers who engage on their behalf. Activities may include direct conversations with leadership, participating in investor coalitions, advocating for public-policy changes, and proposing and voting on shareholder resolutions—written recommendations to boards of directors which all shareholders can vote on.

Shareholders of publicly traded US companies filed 520 ESG related resolutions in 2022, 68 more than in 2021. Although resolutions are not binding, companies pay heed. According to a recent study by BlackRock, management acts on ESG-related proposals in 94% of cases when they achieve a majority vote, and in 75% of cases when the support is at least 30%.

Investors who target sustainability themes identify investments that stand to benefit from secular trends toward greater sustainability in the way we live and work. One way is to buy funds that sell exposure to sustainability themes. Interest in thematic funds has exploded in recent years. In the trailing two years to the end of 2021, thematic fund assets under management nearly tripled, to $806 billion worldwide, although the market cooled in 2022.

More than half of the thematic funds tracked by Morningstar outperformed the Morningstar Global Markets Index over the trailing three years to the end of 2021. But market outperformance drops to just one in ten funds when looked at over a 15-year period, according to Morningstar ETF Research. Investors must also consider thematic fund fees, which tend to be higher than their non-thematic counterparts.

Investors who use security selection to make an impact on sustainability goals integrate impact assessments into portfolio construction. Equity managers may use impact metrics to understand the degree to which a company or investment portfolio is making an impact on a particular sustainability goal. A company’s impact metrics measure the alignment of both its revenues and its operations to a sustainability goal. A portfolio’s impact metrics are derived from the impact of its underlying investments.

Fixed-income managers may consider a bond’s use of proceeds, focusing on bonds that finance projects to benefit people and the environment.