Systematic Sustainability: How to Do ESG Better

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Presented by

Patrick McDonough, Portfolio Manager, PGIM Quantitative Solutions | Brendan Maton (moderator)

About this talk

DESCRIPTION: As the ESG landscape evolves, investors continue to face challenges. ESG portfolios can create significant tracking error to policy portfolios and traditional benchmarks. To address this as well as individual client preferences and increased regulatory scrutiny, PGIM Quant believes an effective ESG strategy needs to include the following: ROBUST PORTFOLIO MANAGEMENT: By definition, ESG investing introduces risk into portfolios as it deviates from the original investment mandate, and therefore, from the originally selected benchmark. Comprehensive ESG portfolio construction requires a robust ESG model, focus on risk awareness, and the ability to outperform in proportion to the targeted risk. TARGETED ESG SOLUTIONS: The right ESG strategy should match the client’s desired risk and return profile – but not just when ESG is in favor. Rather, the ESG exposure should be additive so as not to detract from the fiduciary goals, and an asset manager’s response to those goals must be targeted and specific without introducing material tracking error, sector bets, or unintended risks. TRANSPARENCY: Simply labeling an investment “ESG” no longer has any true meaning – ESG can mean many things to many people. Historically, companies have been arbitrarily classified as either “good” or “bad” based on a simplistic ESG score. However, as investor expectations – and regulatory scrutiny – have evolved, that methodology has become outdated. Rather, we believe it’s imperative to focus on a company’s impact in order to unwind the activities of a company across targeted norms and exclude from the investment universe those firms that fail to meet standards in compliance with a client’s beliefs. Looking at the risks associated with ESG – both good and bad – along with the need for transparency, gives investors true exposure to the ESG metrics that matter to them.
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