ESG Scoring Providers and Implications for Portfolio Construction

In this paper, we analyze how an investor’s choice of environmental, social and governance (ESG) data provider can impact some of the major drivers of portfolio returns. Our goals are to showcase how different — or similar — portfolios can be, based on the selection of an ESG data provider, and to understand how limiting tracking error against a benchmark can impact the analysis. We also look closely at the relative tracking error between the three data providers used in our analysis.

To perform our analysis, we constructed ESG portfolios using three distinct data providers and then compared the attributes of each. Our results show that the choice of data provider does impact a broad range of important portfolio characteristics — even when comparing portfolios with similar levels of tracking error versus the benchmark. We hope that our findings will help investors gain insight into the inherent trade-offs in selecting a particular provider.