be no silver bullet for environmental, social, and governance (ESG)
Despite ESG becoming
more widespread, investors often compare “apples to oranges [because of]
different definitions of ESG, different ways of screening, and different
methods of integration,” said Matt Orsagh, director of capital markets
policy at the CFA Institute.
But while the varying
definitions and implementations might cause confusion, Orsagh argued that
custom application is imperative for success in ESG investing.
“A 360-degree view on
the entire ESG arena… is more useful than simply asking how beneficial it can
be to your portfolio,” said Orsagh in an interview with CIO.
“[investors] need to decide exactly what ESG means to them, what information
and data to focus on, and how integration best works for them, as there is no
one size fits all model as far as integration is concerned.”
Even though there
are “more and more” ESG indexes, he continued, these indexes
don’t “tell you much about the assumptions that go into making [them].”
“If you are a plan
manager or investor, you need to understand how an index is constructed and
what ESG assumptions it makes before using it,” Orsagh said.
A standard definition
of each the individual ESG components has not yet been established, he added.
assumptions won’t be uniform across the board; what ESG factors are material
changes from company to company,” Orsagh said. “It boils down to this: Every
company invested in has their own environmental, social and governance issues.”
investment specialist at outsourced-CIO Hirtle Callaghan, has also
recommended a customized approach to ESG.
“It’s difficult at an
investment committee level to understand how to represent ESG across the
portfolio,” he said in a previous interview with CIO.
“It’s much bigger
than negative screening. It’s about assessing environmental risk; it could
involve identifying labor practices that could be material to the company,”
Wilson continued. “It’s much wider than morals and values. I see it [ESG] as
proactive investing for people who wish to analyze all the underlying risks.”
Related: ESG’s Image Problem; ESG ‘Key’ to Outperformance in Emerging