• Environmental: issues connected to climate change or waste and pollution management.
  • Social: working conditions, including diversity, child labor or health and safety.
  • Governance: business ethics, corruption or remuneration policies.

From the perspective of a data-driven investment process, ESG criteria are heterogenous, not to say all over the map. Some are clearly measurable and meaningful data is available. Others are more qualitative than quantitative.

A number of firms including MSCI, FTSE, Sustainalytics and RobecoSAM to name a few, are currently issuing ESG ratings. As an example, MSCI's methodology looks at 37 issues across the ESG spectrum and compiles them into a numeric score from 0 to 10. These scores provide a possible basis, or at least an interesting data point, on which to build a sustainable portfolio. The question remains – what characteristics are typical for a portfolio that follows an ESG rating system?

  1. The high and low scores are unevenly distributed across sectors – energy, for example, coming up short more often than not on "E" but doing well on "S" – and countries. This is a skewing the portfolio will reflect.
  2. ESG ratings may change over time, with many scores changing significantly from one year to the next. Hence, expect a certain degree of turnover, if you wish to follow ESG leaders.
  3. Performance metrics show that a high ESG-score can be potentially a source of outperformance. This is true for both sector-neutral and sector-unconstrained portfolios.

Please continue here to learn about the analytics in more detail, and to see why it is definitely worth your while to check ESG ratings before making an investment decision.


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