The Third Era of Integrating ESG Into Investment Processes

We appear to be entering the third era of ESG (Environment, Social, and Governance) investment integration. Existing data sets have been broadened to improve their coverage and their providers have clarified their methodologies. New data sets are available that offer insights that were not previously available. A wider range of asset owners are requesting investment products that have sustainability-related claims. This has prompted the creation of passive ETFs, single theme funds (e.g., gender lens, decarbonized), and various types of hedge funds (including long-short and short-only offerings). The first generation of ESG investors used data on topics such as product involvement (alcohol, tobacco, gambling) or business practices (anti-union, involvement in Burma) to screen out “bad” companies. The second generation of ESG investors decided that a company’s sustainability performance should be related to its riskiness and/or its financial performance. Third generation investors appear to be looking for: -A consistent signal. Investors want to integrate as much of the available ESG information as possible into factors that are comparable across all companies, industries, and countries. -Broad coverage. ESG data influences investment in large cap, small cap, and emerging market equities. It is also increasingly important in fixed income investment processes. -Many years of data history. Most portfolio management and quantitative analysis systems perform better when at least five years (and ideally ten years) of history is available. -Integration with other sources of data. Investors would like ESG piped to their desktop and already linked with the other financial and market return data they normally use. New ESG data providers are emerging that seek to meet these needs. The leader of this webinar, Bahar Gidwani, is a co-founder of one of these providers.