ESG Integration
ESG integration aims to improve financial performance and/or mitigate financial risk by considering ESG factors explicitly and systematically in investment analysis and decisions to lower risk and generate returns.
As a fiduciary, we believe that material ESG factors can affect the performance of investments to varying degrees across companies, sectors, regions, asset classes, and over time.
The objective of integration is not to achieve particular environmental, social, or governance goals, but considering material ESG components as a driver of risk and/or return.
ESG Integration in Practice
Active
ESG integration encompasses the use of qualitative and quantitative ESG information in the investment processes, with the objective of enhancing investment decision-making. Integration of ESG issues can be used to inform economic and industry research, at the stock or issuer level or at the portfolio construction level.
Index
Integration of ESG issues into alternative-weighted ESG indices in which the constituents’ security weighting takes into account the ESG characteristics of the company or country. ESG data are included in the investment process and could result in upward or downward adjustments to the weights of securities, including to zero.
Smart Beta
Integration here involves identifying correlations between ESG factors and price movements that can generate alpha and/or reduce risk. Models are constructed to integrate ESG factors alongside other factors, such as value, size, momentum, growth, and volatility.
The main approaches to integrating ESG factors into quantitative models can involve adjusting the weights of:
- Each security in the investment universe, according to the statistical relationship between an ESG dataset and other factors.
- Securities ranked poorly on ESG to zero.
- And reducing the exposure to poorly ranked stocks through constraints.