Introduction to ESG
This domain fixes the vocabulary the rest of the syllabus assumes: what ESG means, how responsible-investment approaches differ from one another, how the market and its frameworks developed, and why materiality decides which factors enter an analysis. Exam items here are definitional and comparative - you must match a precise description to the right label, not the most familiar one.
One umbrella, several approaches
Responsible investment is the umbrella. Beneath it sit distinct practices: ESG integration (using material factors inside financial analysis); negative or exclusionary screening; norms-based screening (excluding breaches of frameworks such as the UN Global Compact or OECD Guidelines); positive or best-in-class screening (selecting leaders within each sector); sustainability-themed investing (clean energy, water); impact investing (intentional, measurable positive outcomes, often assessed using GIIN's five dimensions of impact); and stewardship or active ownership.
Materiality is the hinge
Which factors matter is decided by materiality. Financial materiality asks what affects enterprise value; environmental and social materiality asks what a company's activities do to the world. EU reporting uses both, labelled double materiality. Industry-specific materiality maps such as SASB are more decision-useful than generic checklists, because materiality is sector-relative - employee safety dominates for mining, data privacy for banks.
Milestones examiners like
The UN Global Compact (2000); the PRI, launched in 2006 with six principles; the Freshfields report (2005) arguing ESG factors are consistent with fiduciary duty; the Paris Agreement and TCFD (2015); ISSB standards S1 and S2 (2023).
Worked example
A trustee says: we want ESG, but we cannot exclude the energy sector. The correct answer is ESG integration plus engagement, not exclusion. Integration feeds material factors - carbon-price exposure, transition capex, safety record - into forecasts and valuation while the sector stays in the universe; engagement seeks change in holdings. Calling this negative screening is wrong, because no company is removed from the investable set.
Traps that cost marks
Treating ESG, SRI, ethical and impact investing as synonyms; assuming ESG integration requires divestment; thinking PRI signatories must exclude anything; confusing best-in-class with exclusion; assuming impact investors always accept below-market returns - some do, many target market-rate returns.