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Environmental, social, and governance (ESG) portfolio characteristics have become an increasingly important consideration for investors over the past decade. However, effectively applying ESG characteristics in portfolio management has remained challenging due largely to a general lack of data history and consistency.


These issues have created tremendous noise and confusion across many ESG investment stakeholders. Rating providers have yet to reach consensus on standardized research criteria, and, in fact, most have themselves not even followed consistent approaches to ESG ratings through the years. Many investment managers also frequently introduce their own ESG proprietary rating standards, adding to the measurement variances across the industry. And, asset owners themselves can vary widely in what they mean by “ESG” in relation to their portfolios.

Implementing ESG research in this cloudy landscape can often be time consuming and resource intensive, typically relying on bottom-up, fundamental analysis on a company-by-company basis. However, our research shows that targeting portfolio-level ESG outcomes may not require the extensive individual-security research that has become the norm for most socially responsible investments.

Focusing on Portfolio Characteristics vs. Stock Ratings

In our own ESG-managed portfolios, we strive to understand how ESG considerations can affect portfolio exposures, which in turn can contribute to shifts in both alpha potential and risk profile. A vital step in developing this understanding is to reconstruct ESG portfolios over long periods of time, preferably multiple decades, to allow studying how the corresponding exposures behave under a variety of market dynamics.

“...we use statistical analysis of third-party ESG ratings to identify which systematic factors are persistent and dominant. This allows us to express the stable characteristics of ESG ratings at the portfolio level in non-ESG terms...”

In this process, we use statistical analysis of third-party ESG ratings to identify which systematic factors are persistent and dominant. This allows us to express the stable characteristics of ESG ratings at the portfolio level in non-ESG terms, allowing for an extrapolation over history—much longer than time horizons provided by ESG rating services—and essential for robust estimates of ESG risks.

The result is a practical approach that has proven to be reliable, repeatable and more related to managing systematic than idiosyncratic risks, offering a far more efficient portfolio-management model.

Find Out More

Our latest research paper highlights how this process works, using a simplified proof-of-concept example. Download it here.

ESG Made Easier  Constructing ESG Portfolios with Non-ESG Data Read Paper


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