Why best-in-class investing matters
It can preserve sector diversification and reward relative leaders, but still owns high-impact sectors and depends heavily on score methodology.
How it is applied
Define the comparison universe, sustainability issues, data sources, scoring, sector treatment, threshold, weighting, controversies, and review frequency. Select issuers that rank relatively better than peers under the methodology while retaining ordinary analysis of valuation, financial quality, liquidity, and portfolio construction. Disclose ties, missing data, and exceptions.
Portfolio example
A global equity strategy ranks utilities on emissions intensity, transition investment, safety, governance, and disclosure, then permits the stronger-scoring half within each region. It may still own a high-emitting utility because that company ranks better than sector peers. The approach preserves sector exposure while favoring relative leaders.
How to interpret it
Best-in-class investing selects comparatively stronger performers on chosen ESG or sustainability criteria, often within each industry. It differs from excluding an entire activity. Relative leadership does not mean an issuer has low absolute impact, and ranking depends heavily on methodology and data.
Limitations and common misconceptions
Scores can reward disclosure rather than performance, providers disagree, and sector-relative selection can include companies that conflict with investor values. Thresholds create turnover after small ranking changes. Current leaders can fall behind, while laggards may improve faster. Portfolio tilts and valuation can dominate sustainability effects. Research should state whether assessment is sector-relative or economy-wide and show material indicators behind the rank. Compare holdings with the claim and update after controversies or methodology changes. Do not describe a selected company as sustainable without context. Investors should decide whether relative selection, absolute thresholds, engagement, or exclusions best serve their objective and measure portfolio consequences separately. Portfolio turnover can rise when ranks cluster near a cutoff, so buffer rules and engagement periods may improve stability. Data should be normalized for company size and industry only when that serves the objective; normalization can otherwise hide absolute harm. Investors can compare weighted-average characteristics with the benchmark, but averages may conceal severe outliers. A company’s improvement trajectory is separate from its current rank. Methodology changes should be disclosed with their effect on holdings and historical metrics rather than backfilled silently.
Sources and further reading
- What is Responsible Investment?Principles for Responsible Investment