Step one, you would likely assess the entire universe of potential investment options. You and your ESG fund management team would need data on the environmental, social, and governance behaviour and metrics of the potential investments and you would create a formula in which to order, rank, and include or exclude.

Next, you would likely start to exclude industries or companies that you were outside the acceptable norm for ESG funds. It is likely that carbon heavy industries like coal, oil, and gases would be excluded, along with other generally accepted bad actors like tobacco and weapons companies. The remaining potential investment options could be included or excluded based on traditional stock selection metrics AND the ESG criteria of the company or bond. You may decide to put an emphasis on climate change, or social aspect. Corporate governance and behaviour may be more important. Or you may wish to target all aspects of ESG through your fund along with targeting some/all of the sustainable development goals.

Going forward, your ESG fund team would continue to collect data and monitor company behaviour. In order to affect change in the companies you hold, you may first engage with the management team. As owners of the companies you invest in, you do have sway over the decision making process. If engagement doesn’t achieve your goals, you may choose to vote against the board on issues which can be publicly embarrassing, especially if you are a majority shareholder. Lastly, you have the option to exclude the company from your funds if you feel that they have not met targets or have breach your funds ESG criteria. Although this may be a last resort, the threat of divestment is often enough to have an impact on corporate behaviour.