Tsinghua-Invesco Research: Six sustainable investing tips for asset owners

Background

As covered in Invesco’s previous research on asset owners, selected asset owners have a range of sustainable investing objectives and approaches in place. As a continuation, Tsinghua’s research collaboration with Invesco recently consolidated practices from 50+ institutions (including pensions, insurers, sovereign wealth funds) to identify six practical shifts shaping sustainable investing today — why they matter, and how asset owners can apply them.

1. Screening: Shift from exclusions to inclusive management

While the long-standing exclusionary screening approach remains relevant and effective for asset owners with legal/ethical objectives or clear-cut risk avoidance¹, leading practices now use inclusive and dynamic mechanisms to guarantee high flexibility in managing portfolios and enable real-time feedback to adjust investment portfolios. This also helps to avoid the performance and diversification costs of broad divestment. Examples of such approaches include:

• Move beyond simple exclusions (blacklist) and blanket withdrawals
• Establish multi-layered criteria (absolute/relative thresholds, rankings and qualitative review) with scheduled look-backs to update lists.
• Dynamic processes (phase-out, engagement & observation, re-inclusion) create more adaptability by real-time tracking and allowing restoration of investment qualifications.

2. Integration: Shift from third-party scores to decision-use materiality

ESG integration among institutional investors is both diversified across asset classes and embedded throughout the investment lifecycle. The trend of institutions evolving the use of ESG rating systems is aimed at overcoming the backward-looking nature of third-party data and incorporating localized, forward-looking insights and proprietary research.

• The degree of integration ranges from fundamental to quantitative approaches, with implementation differing across active and passive strategies.
• Embed throughout pre-investment (screening, due diligence, and pre-investment engagement), during investment (decision-making and portfolio construction), and post-investment （monitoring and engagement）.
• Embed financially material ESG factors directly into models (cash flows, discount rates, risk premiums) and position sizing.
• Build on internal/localized ESG research and rating team, to achieve coverage and depth that traditional external datasets cannot match.

3. Active ownership: Shift from voting tallies to capacity‑building and value creation

Active Ownership 2.0 encourages outcome-focused practices, promoting investors to be clear on how engagements are oriented towards their investment objectives such as how it supports portfolio value enhancement². Voting tallies matter, but engagement quality and implementation capacity drive financial outcomes for investors. Asset owners should place greater emphasis on continuous interaction with portfolio companies to drive long-term value creation for investment returns. Examples of such approaches include:

• Enhance stewardship outcomes by prioritizing long-term strategic partnerships and capacity building.
• Use multiple tools ranging from engagement to proxy voting.

4. Thematic/impact investing: Shift from labels to objective-driven strategies

Thematic and impact investing are increasingly becoming the focus of asset owners’ sustainable investing strategies. The former focuses on long-term macro trends such as energy transition and demographic shifts, proactively allocating assets related to relevant solutions. The latter, while pursuing financial returns, aims to generate quantifiable positive social or environmental impact aligned to the broader investment objectives of the asset owner. Examples of such approaches include:

• Avoid diluted social relevance and greenwashing labels by building evidence-based impact strategies centered on energy security such as for asset owners with dual‑carbon objectives.
• Adopt scientific frameworks (e.g., IMP³, OPIM⁴, IRIS+⁵⁶) or self-built IMM (Impact Measurement & Management) systems, and require measurable KPIs; structure products for identifiable, material outcomes⁷.
• Use the combination of financial, risk, impact and governance indicators to assess thematic/impact investment.

5. Climate risk management: Shift from disclosures to deeper risk consideration

Regulatory-compliant disclosures are necessary but insufficient. Asset owners are applying the framework for identifying, assessing and managing climate risks as well as scenario analysis to their specific investment practices. We encourage asset owners to move from disclosure to embedding climate risks in their investment processes including: Climate VaR (Value-at-Risk), financed emissions/WACI (Weighted Average Carbon Intensity) and ITR into SAA/ALM (Strategic Asset Allocation and Asset‑Liability Management, for asset owners and pensions) and ORSA (Own Risk and Solvency Assessment for insurers), and use multi‑scenario stress tests to revise LTCMAs (Long‑Term Assumption Updates) and portfolio constraints. Examples of such approaches include:

• Elevate climate risk to SAA and ALM level, embedding it into risk budgets and portfolio constraints.
• Implement Climate VaR and multi-scenario stress testing (physical + transition risks) to revise LTCMAs to reflect extreme‑weather and policy shocks on expected returns and volatility.
• Formulate a brown‑to‑green investment strategy, and apply Implied Temperature Rise (ITR^8 9) for portfolio calibration of “30-60” target¹⁰.
• Nature/biodiversity is integrated via TNFD‑aligned assessments (Taskforce on Nature-related Financial Disclosures) (e.g., ENCORE, Exploring Natural Capital Opportunities, Risks and Exposure and MSA, Mean Species Abundance) and policy levers such as zero‑deforestation.

6. Governance: Shift toward a more active and accountable stewardship of sustainability

Mainstream practices show that without a solid governance structure, adequate resource input and reasonable incentive mechanisms, the application of multi-layer tools alone is difficult to achieve systematic governance effects¹¹. Boards should assume ultimate accountability for consideration of financially material sustainability risks in investments, supported by committee mandates, management incentives and transparent reporting. The end‑state is “top‑down to bottom‑up” alignment—policy, targets, scenarios and engagement informing daily investment decisions and manager oversight, with clear ownership of outcomes. Examples of such approaches include:

• Codify responsibilities, embed ISSB (International Sustainability Standards Board) in governance documentation, and trace strategy resilience, target progress and understand impacts on portfolio.
• Integrate the effectiveness of stewardship into performance evaluation system of relevant teams.
• Having the right governance and team setup enables focus on long-term value creation

Conclusion

Tsinghua research highlights that institutional portfolios are moving from principles to practice. For asset owners, the common thread across leaders is operationalizing sustainability: dynamic screening over blunt exclusions; decision‑use integration over score reliance; outcome‑oriented stewardship over activity counts; objective‑driven thematic and impact allocations; climate analytics embedded into ALM/SAA. Behind this series of shifts lies a fundamental upgrade of the governance structure, that is, a combined implementation of sustainable investment from the top-level decision-making to the execution.

In short, the frontier is no longer what to disclose but how to underwrite, value, size and govern with sustainability, so portfolios are more resilient, risk‑adjusted returns improve, and capital actively delivers on broader objectives of asset owners.

Note: more institutions’ practices under sustainable investing framework can be found in the appendix of the PDF version

Investment Risks

The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations), and investors may not get back the full amount invested.