A standout amongst others in a given field or peer group in terms of performance. Investing in businesses that outperform their peer groups in terms of sustainability and performance. Best-in-class is a sustainable investment style.
The top performer among ESG investments
Investments that are considered "best in class" in terms of environmental, social, and governance (ESG) standards are hand-picked and added to a portfolio. Companies are typically graded on several dimensions. The final score you get is determined by the relative importance given to each criterion, which can change from industry to industry. Companies that rank in the top 30%, 50%, or some other criterion in their respective industries will be considered qualified. Companies that pass both an ESG screen and a financial screen—which are often performed by separate teams of analysts using their own data and methods—are included in a top-tier ESG portfolio. The names that make it through both the ESG and financial screens are then used by the portfolio manager to construct the portfolio. Best-in-class portfolios are common in SRI products because they work well with near-passive investment strategies that need low tracking error to a broad market index.
Cons
The downside of this strategy is that it produces Socially Responsible Investment (SRI) portfolios that are not much different from traditional portfolios. In response, some socially conscious investors are considering building passive or nearly passive portfolios using customized ESG or sustainability-designed indexes. If such portfolios are able to achieve their investors' goals at a lower cost than best-in-class ESG active portfolios, they may become a viable and even preferable alternative.