#1: Do the research, decide on an approach, and review the potential investment options

A variety of potential approaches exist across the spectrum of ESG and sustainable investing:

An ESG-integrated approach involves rigorous analysis to understand the ESG trends and factors that affect investments. The primary goal is to achieve better returns by identifying and managing critical investment risks effectively. Excluding companies is typically not the goal of this approach. Instead, engagement with issuers can revolve around the management of issues across the ESG spectrum to ensure earnings growth, cash flow durability and a resilient business model.
Sustainable investments seek outcomes as a goal of the investment process, while remaining focused on investment returns. If an ESG-integrated approach is about anticipating financial risks and opportunities affecting a company today, a sustainable approach seeks to identify businesses that will thrive in the long run. Exclusions based on economic analysis may apply here, depending on the investment philosophy and definition of sustainability.
In our view, Thematic investing with a sustainability angle is about pursuing investment themes that align with and target the United Nation's Sustainable Development Goals (SDGs). These themes can include climate change, responsible consumption, or sustainable infrastructure, to name a few. Thematic investing is a way to capture direct exposure to trends that are gaining global momentum, such as the energy transition and other areas of innovation and disruption. Thematic investments may be narrow and exposed to structural and cyclical risks, such as slow policy momentum, rising rates, and supply chain disruptions; therefore, time horizon is an essential consideration, particularly for multi-decade trends.
At Schroders, we define Impact investing (aligned with the International Finance Corporation definition) as investments made in companies or organizations with the intent to contribute measurable positive social or environmental impact, alongside a financial return.

While Thematic and Impact approaches to investing have become more common in recent years, we will need to keep an eye on whether plan sponsors seek to include these types of strategies in plan lineups in the near term. Plan fiduciaries will need to carefully analyze individual funds or strategies before including them in a DC lineup.

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