Consistent ESG through ESG Benchmarks

There has been a wide range of research in academia and the asset management industry about the financial benefits of ESG investing. However, the equally important question about how to achieve consistency when integrating ESG and what methodologies to use has not received the same level of attention. As a result, ESG integration is often applied inconsistently and incompletely across portfolios. The authors provide a framework for the integration of ESG into benchmarks at various strategic levels—from the top policy benchmark level to the performance benchmark of individual allocations. In addition, they highlight the different investment objectives that asset owners may pursue when integrating ESG and how they can reflect these in their choice of ESG benchmarks. They find that integrating ESG into benchmarks makes sense as a framework to achieve consistency because benchmarks are not only used at different strategic levels but also across all areas of asset management—index-based, factor-based, and active management—to define the underlying investable universe and to provide a yardstick for performance. TOPICS: ESG investing, analysis of individual factors/risk premia, portfolio construction, portfolio management/multi-asset allocation