Why Customization is the Key to ESG

A three-dimensional approach works best for environmental, social, and governance investing, according to the CFA Institute’s Matt Orsagh. 

There may be no silver bullet for environmental, social, and governance (ESG) investing. 

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.

“Fundamental 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.”

Garrett Wilson, 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 ProblemESG ‘Key’ to Outperformance in Emerging Markets

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