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Applying ESG data to the investment process

Applying ESG data to the investment process

Year-on-year, there is increasing pressure - both moral and commercial - for asset owners and investment institutions to consider seriously their wider responsibilities toward ethical and sustainable investment. With respected organisations such as the World Economic Forum and the United Nations championing the cause, an increasing number of investors are accepting ESG factors as an important component of successful long-term decision making.


Below we list some of the best papers released in recent months, exploring why this trend is growing, how ESG factors can practically be integrated into the investment process, and what resources are available to support investors seeking to apply an ESG framework.

ESG: Road Blocks or the Road to Integration? (FTSE Russell, April 2016)
This seven-page study from FTSE Russell examines how practically to apply an ESG framework. FTSE Russell is a leader in driving the global alignment of standards, drawing a framework for each “ESG theme” on which companies are evaluated.

European Responsible Investing Survey 2015 (KPMG)
This 60-page report from KPMG is a comprehensive survey of the landscape for ESG funds. It covers environmental, social, ethical, governance and cross-sectoral issues, including impact investing and faith-based investing. The authors detail the challenges and trends within the ESG funds industry in Europe, but the analysis and lessons are helpful to institutional investors worldwide.

ESG Integration into the Investment Process (CalPERS, 2016)
This presentation by US Pension Fund, CalPERS, gives an outline of how ESG factors can be integrated into the investment process. It touches on investment beliefs, public markets, private markets and portfolio tilting.

Risks and Opportunities from Climate Change: Playbook for the Truly Long-Term Investor (Cambridge Associates, 2015)
How should investors approach climate change? Climate risk is multi-layered and there are many issues for the truly long-term investor to consider. Some of these are defensive (how to preserve value) and others are offensive (what opportunities does climate change present?)

Institutional Investors and Sustainable Development (CalPERS / UNPRI / UNEP, 2015)
This report explores the changes necessary for institutional investors to adopt a more long-term and sustainable approach to investment. The authors challenge policymakers to create incentives for consultants to develop services which incorporate sustainability.

UK Pension Fund Stewardship Survey 2016 (PLSA)
The PLSA's annual survey examines how UK pension funds are exercising their responsibility to be good stewards of their assets. The survey considers stewardship principles, shareholder engagement and voting, class actions, asset manager selection and review, fund manager capacity and a variety of other topics within the umbrella of ESG and good stewardship.

Implementing the Paris Climate Agreement: An Action Framework for Investors and their Financial Advisors (UN, Feb 2016)
This report by the UNEP Finance Initiative helps debt investors and their financial advisors to develop ESG integration strategies, focusing on materials risks and opportunities.

A Framework for Integrating ESG Factors into Portfolio Construction (Pavilion, 2015)
Each fund that practices responsible/sustainable investing has different ESG priorities. In this paper, a practical framework for client-specific ESG metrics integration is outlined so that equity portfolio construction can surmount problems inherent in other varieties of responsible investing.

How Asset Owners Can Drive Responsible Investment: Beliefs, Strategies and Mandates (United Nations PRI 2016)
The UNPRI has set out six principles for responsible investment, and encourages asset owners to use their influence to drive a change in approach by institutional asset managers. This report includes interviews with organisations that have implemented resilient and responsible strategies.

The Landscape of Climate Exposure for Investors (2015)
In this 28-page paper, the landscape of climate exposure is explored and the limitations and strengths of tools, financial products and ESG data are examined. The paper seeks to help investors to identify which climate-related decisions are the most effective and significant.

The impact of ethical investing on returns, volatility and income (Newton IM, 2016)
How does the imposition of ethical constraints on an investment portfolio impact its returns? The authors examine the impact of common frameworks, providing an academic start point for research.


ESG in Private Equity

ESG in Private Equity: from buzzwords to tangible implementation (PGGM, 2015)
This paper examines how ESG factors can be brought beyond the buzzwords of theory and how ESG risks can be measured and managed in real life. In particular, the moral ethics of investing in weapons and tobacco are considered, and the opportunities around new, ESG-related products are explored.

Aligning the Responsible Investment interests of LPs and GPs (PwC, 2015)
It is evident, through PwC's engagement with private equity investors, that interest in responsible investment is increasing. Thus, there is now a need to demonstrate this value and bring investors and managers to a place of mutual understanding.

Integrating ESG into Private Equity (UN PRI, 2014)
This 36-page report from UNPRI is based around by interviews with forty private equity firms around the world. It explores how ESG factors might be integrated and incorporated into a Private Equity investment process.


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