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ESG integration aims to improve financial performance and/or mitigate financial risk. It involves considering ESG factors explicitly and systematically in investment analysis and decisions to lower risk and generate returns.
It is not about achieving particular environmental, social, or governance goals. It’s about looking at the whole investment picture and considering material ESG components as a driver of risk and/or return.
From a fiduciary perspective, ESG integration should take into account all financially material risks and opportunities that arise out of ESG information. Integrating ESG into your investment decision is an important element in achieving superior long-term compounding benefits.
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.
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.
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.
In the past, environmental, social and governance (ESG) considerations were often used as overlays in existing portfolios, i.e., as screening tools rather than as an integrated component of the investment process. The last decade has seen a shift by asset managers toward incorporating ESG concepts into their investment philosophies, with the aim of enhancing alpha generation and risk mitigation.
Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Disclosure related to each of the State Street Institutional Liquid Reserves Fund and the State Street ESG Liquid Reserves Fund: You could lose money by investing in the Fund. Because the share price of the Fund is expected to fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Global Advisors, Inc.. The Fund pays State Street Bank and Trust Company for its services as custodian, transfer agent and shareholder servicing agent and pays SSGA Funds Management, Inc., an affiliate of State Street Bank and Trust Company, for investment advisory services.
Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. Click the link to obtain a prospectus or summary prospectus which contains this and other information, or by calling 1.877.521.4083. Please read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value