Best-in-class is an approach to sustainable investing in which an investor keeps exposure to every industry but selects only the companies that score highest on environmental, social and governance (ESG) measures compared with their direct peers. A best-in-class fund can therefore own an oil company or a bank, provided it is among the better performers in its own group. Asset managers, index providers and pension schemes use the method to build portfolios that look like the wider market while leaning toward stronger ESG practice.
Outside investing, "best-in-class" simply means the top performer in a peer group: a product, process or firm that sets the standard others are measured against. In ESG work the phrase keeps that comparative sense. It is usually set beside exclusionary screening, which removes whole industries, and beside a positive tilt, which keeps every holding but changes the weights. Industry bodies such as the Global Sustainable Investment Alliance list positive or best-in-class screening as one of the main sustainable investment strategies.
Best-in-class in plain terms
Picture a school that wants to send a team to a quiz. Instead of picking only from the science class, it takes the best student from every class: history, art, sport and maths. Every subject is still represented, but each place goes to whoever did best in that subject.
Best-in-class investing works the same way. The investor does not say "no airlines" or "no miners". It says "if we own an airline, it will be one of the airlines doing the most to cut fuel use and treat staff well". The portfolio still covers the whole economy, so it behaves broadly like the market, but within each industry it favours the leaders over the laggards.
How best-in-class selection works
The process starts with a universe of companies, often an index such as a national or global equity benchmark. Each company receives an ESG score from an in-house team or a specialist ratings provider. Scores are then compared only within a peer group, usually a sector or industry, because the issues that matter differ sharply: water use is central for a beverage maker, data privacy for a software firm and safety for a mining group. Frameworks such as the SASB Standards were built on this idea of industry-specific financial materiality.
The manager then keeps a set share of each sector. Common rules include:
- A top-slice rule. Only companies in, for example, the top half or top third of their industry by ESG score are eligible.
- A sector-weight rule. The portfolio holds each sector at roughly its weight in the benchmark, so the industry mix does not drift.
- A floor rule. Companies below a minimum score, or involved in severe controversies, are dropped whatever their rank.
- A review cycle. Scores are refreshed periodically and holdings rebalanced, often quarterly or annually.
Because sector weights are held close to the benchmark, best-in-class portfolios usually have a modest tracking error compared with funds that drop whole industries. That makes the method attractive for core holdings in mutual funds, exchange-traded funds and institutional mandates where staying close to the market matters.
Where the approach is used
Many ESG index families apply a best-in-class rule, selecting the higher-rated companies within each sector until a target share of the sector's market value is reached. Large asset owners use the same logic in segregated accounts, and a portfolio manager may combine it with other tools: removing a short list of excluded activities first, then picking the leaders among what remains, then voting and holding dialogue with the companies owned through corporate engagement and investment stewardship.
The approach is often contrasted with ESG integration, where ESG data is one input into an analyst's valuation rather than a pass-or-fail filter, and with thematic investing, which deliberately concentrates on industries linked to a trend such as clean energy. Best-in-class is a selection rule, not a promise of real-world impact; investors seeking measurable outcomes usually look to impact investing instead.
Regulation and disclosure
No law defines "best-in-class". What regulators police is whether a fund's name and marketing match its holdings. In the United States, the SEC amended its fund Names Rule in 2023 so that funds whose names suggest ESG characteristics must invest at least 80% of assets accordingly; compliance dates were later extended to June 2026 for larger fund groups and December 2026 for smaller ones. In the EU, ESMA guidelines on fund names using ESG terms have applied since November 2024 for new funds and May 2025 for existing ones, and the Sustainable Finance Disclosure Regulation (SFDR) governs product disclosures. In the UK, the FCA anti-greenwashing rule has applied since 31 May 2024.
Criticism and limitations
The main objection is that "best in a bad industry" can still mean a large carbon footprint or harmful product: a fund can hold the cleanest coal miner and call itself sustainable. Supporters answer that keeping every sector rewards improvement where it matters most and keeps diversification intact.
Other limits are practical. ESG ratings from different providers often disagree, so a company can be a leader under one score and average under another, unlike the closer agreement usually seen between credit ratings. Scores rely heavily on company disclosures, which can favour large firms with big reporting teams. Peer-relative ranking also says nothing about absolute performance: if a whole industry is poor, its top third may still be poor. Investors reading a fund's prospectus or fact sheet should check which score is used, how peers are defined and what share of each sector is kept.