The Spectrum of Sustainability

Sustainable investing has gone from niche to mainstream in just a few years - but with that growth has come confusion. ESG, ethical investing, responsible investing… what do they all actually mean? And more importantly, how can investors make sense of it all?

Let’s break it down.

For many investors, the natural starting point is the name of a fund. However, in this world, the label doesn’t tell you the full story. One of the most important things to understand is that sustainable investing isn’t a fixed category - it’s a range of approaches.

• There’s no universal standard for definitions
• Two funds with similar names can use completely different methods
• The same company can receive different ESG scores depending on the provider

To truly understand where your money is going, you need to pop the hood and look at how the investment is constructed.

Rather than thinking in rigid categories, it’s more useful to see sustainable investing as a spectrum - from traditional investing through to philanthropy. You might see "ESG" on the tin, but that doesn't mean the fund only uses one method.

Many modern strategies, including Kernel’s, utilise a combination of many approaches across this spectrum to aid in building a robust portfolio.

Here’s how the main approaches differ:

1. Traditional investing
Focuses purely on financial factors like revenue, profit, and growth.

2. ESG integration
ESG factors are incorporated into investment analysis alongside purely financial data. The goal is to better understand all the risks and opportunities that may affect investments or markets so we can adjust accordingly.

3. Exclusions/ Negative screening
Certain industries or companies are ruled out based on a practical decision on risk rather than just a moral one, driven by the belief that an industry may face significant long-term or legal headwinds. Commonly seen with tobacco, controversial weapons, or fossil fuels.

4. Norms-based screening
Investments are filtered against global standards or norms, such as human rights frameworks or international conventions. Companies that fail to meet these standards are excluded.

5. Stewardship (engagement & voting)
Investors can also use their position to try and encourage companies, organisations or governments to move to more sustainable practice. This can be very effective and includes:

• Voting on company resolutions (fund managers do this on their investors behalf, called proxy voting)
• Engaging with management and boards
• Collaborating with other investors to push for better practices

By using the 'carrot' of engagement to work directly with organisations on ESG issues, influencing them to improve their practices from the inside, and complementing this with voting, the 'stick', investors can hold companies accountable and effect change.

6. Positive / Best-in-class screening
Rather than avoiding the worst performers, this approach actively selects companies that score highly on ESG factors compared to peers.

7. Thematic investing
Targets specific long-term trends, such as clean energy, climate transition, or social impact themes. An example of a thematic, sustainable fund is Kernel’s S&P Global Clean Energy Fund which provides a ‘tilt’ to those companies delivering renewables.

8. Impact investing
Goes a step further by aiming to generate measurable positive social or environmental outcomes, alongside financial returns.

9. Philanthropy
At the far end of the spectrum, this involves allocating capital such as money, time, skills, with no expectation of financial return - purely to create positive impact.

ESG is at the heart of many of these approaches - but it’s often misunderstood.

ESG isn’t a single strategy or score. It’s a framework used to assess risks and opportunities of a company that may not show up in financial statements that have been traditionally used in decision making.

• Environmental: climate exposure, resource use, biodiversity
• Social: labour practices, supply chains, human rights
• Governance: leadership quality, incentives, accountability

These factors can materially affect a company’s long-term performance. That’s why ESG drivers are increasingly seen as tools for better investing, not just feel-good metrics.

Our strategy is designed to bring together the frameworks from ESG integration, screening (including exclusions and norms-based approaches where relevant), positive tilts, thematic alignment to the climate transition, and active stewardship.

In practice, we invest in globally diversified companies that are screened on business activities, selected using ESG characteristics and climate alignment scores, and we track an index that tilts toward companies better aligned to a net-zero pathway - while being optimised to minimise deviations from the underlying index.

This is complemented by proxy voting, the 'stick' used when engagement fails or progress stalls, allowing us to use our voting power on all available resolutions to hold companies accountable on behalf of customers.

Every sustainable investing approach involves trade-offs.

• Values vs diversification: The more you exclude, the narrower your investment universe
• Precision vs simplicity: More targeted strategies can be more complex
• Market tracking vs deviation: Tilting toward specific themes can lead to performance that differs from the broader market

There’s no single right answer. What works for one investor may not work for another.

Two funds might both be called “sustainable,” but one could simply integrate ESG factors, while another actively excludes industries or targets measurable impact. The key is understanding your goals, asking the right questions, and recognising that every investment approach involves compromise.