ESG Portfolio Tracking and Data Analysis

ESG Portfolio Tracking and Data Analysis

Arun Kelshiker

20 years: Asset management and stewardship

In the previous video, Arun Kelshiker introduced the integration of ESG into investment portfolios. In this video, he explains the role of ESG benchmarks and ESG data providers and the current limitations with regards to ESG data.

In the previous video, Arun Kelshiker introduced the integration of ESG into investment portfolios. In this video, he explains the role of ESG benchmarks and ESG data providers and the current limitations with regards to ESG data.

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ESG Portfolio Tracking and Data Analysis

12 mins 29 secs

Overview

ESG considerations are increasingly important in investment decision-making. Key tools in this space include ESG benchmarks and ETFs. These benchmarks, such as the S&P ESG 500, track the performance of companies with high sustainability profiles, providing investors with reference points for portfolio risk and performance. Similarly, ESG ETFs like the iShares ESG Aware MSCI USA ETF combine traditional ETF strategies with ESG considerations for broad diversification and market-like returns. However, challenges exist due to varied ESG rating methodologies among data providers like MSCI and Sustainalytics, leading to rating divergence. As ESG metrics become more critical in investments, calls for transparency and standardised rating methods grow stronger.

Key learning objectives:

  • Understand the importance of ESG benchmarks

  • Outline the purpose of ESG Exchange Traded Funds (ETFs)

  • Identify the different ESG data providers

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Summary

What is the role of ESG benchmarks?

ESG benchmarks play a critical role in sustainable investing. These benchmarks, like the S&P ESG 500, serve as key reference points, allowing investors to evaluate their portfolios in terms of risk, performance, and crucially, ESG characteristics. They feature companies with superior ESG scores and exclude those engaged in controversial sectors or with poor ESG performance. This structure not only provides valuable market insights but promotes responsible investing. For climate-focused investors, benchmarks such as the EU Climate Transition and Paris Aligned Benchmarks offer targeted guidance, aligning investments with the Paris Agreement's objectives and offering tools to measure decarbonisation efforts, thereby shaping sustainable finance initiatives.


What is the purpose and benefit of ESG ETFs?

ESG ETFs serve the dual purpose of delivering market-like returns and promoting sustainable investing. They offer investors a low-cost, diversified portfolio while integrating ESG considerations into their investment processes. Benefits include screening out controversial sectors, tracking specific ESG indices, and aligning investments with sustainability goals. Popular ESG ETFs like iShares ESG Aware MSCI USA and Vanguard ESG US Stock ETF exemplify this approach. The growing trend of thematic ETFs further emphasises the role of ESG ETFs in driving sustainable investing.


What are ESG data providers and what are the current limitations of the data?

ESG data providers, such as MSCI and Sustainalytics, source data from multiple channels to rate companies on environmental, social, and governance (ESG) aspects. These ratings aid investment decisions. However, current limitations include significant divergence in ESG ratings among providers due to differing methodologies, leading to confusion and reducing comparability. For example, Tesla's ratings varied drastically between providers. The lack of transparency and standardised reporting criteria in ESG ratings also limit their utility. These issues have led to calls for greater transparency and improvements in the ESG data space.

 

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Arun Kelshiker

Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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