Sustainable Investing / ESG

2 Must Read Papers on Sustainable Investing

Evaluating ESG criteria and sustainability as part of the investment process is becoming increasingly...

March 18, 2021

Evaluating ESG criteria and sustainability as part of the investment process is becoming increasingly important for many institutional investors. However, most information written on the topic to date has tended to focus more on the individual asset class level.

Arguably, to benefit the most from ESG and sustainability and to have the biggest impact it is much more important to evaluate from a total portfolio perspective. 

There are a few asset managers approaching the topic and having read a lot of material we have selected two of our favourite papers on the topic below.

1. The five practical issues of incorporating ESG into multi-asset portfolios, Schroders

Schroders believe that there are five practical issues asset owners need to address when implementing environmental, social and governance (ESG) considerations across assets.

This paper sets out each of the five and serves as a useful practical guide for what asset owners need to consider when implementing ESG from a total portfolio perspective.

They recommend asset owners first establish an overall ESG philosophy, then understand the effect of that on the total portfolio. Asset owners need to decide how to incorporate ESG into the asset class level as well as into asset allocation decisions. Finally, it is important to evaluate ESG consistently across the portfolio and Schroders recommend creating an ESG dashboard to assist with this.

2. A framework for Environmental Social and Governance Considerations in Portfolio Design, AQR

This paper proposes a simple framework to consider the impacts of ESG issues with respect to their role in investment decisions. 

As a first step, AQR identifies three distinct avenues by which ESG considerations may impact on fund investment performance. AQR further categorizes each of these key areas as either "ESG Beta" or "ESG Alpha" impacts.

AQR argues that 'ESG Beta' should be the core component to any funds incorporation of ESG consideration. ESG Beta has the greatest potential benefit to fund returns on average and can simultaneously benefit all funds.

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Ed Studd

CEO, Zermelo

Ed is passionate about helping institutional investors meet their goals through better custom solutions. Prior to Zermelo, he gained extensive experience across asset management, investment banking and investment consulting.