Lesson 8 of 8 · All lessons in this module
- The investment policy statement: why and what
- Risk objectives and risk tolerance: ability vs willingnessVideo lesson
- Return objectives and the required returnVideo lesson
- Constraints: liquidity, horizon, tax, legal and unique circumstancesVideo lesson
- Asset classes and the strategic asset allocation
- Integrated case: IPS thresholds, client exclusions and the efficient frontier
- From SAA to portfolio: risk budgeting, TAA, selection and rebalancing
- ESG considerations in planning and construction
Lesson 8 of 8 · 13 min
ESG considerations in planning and construction
Responsible investing preferences enter the IPS and then shape the SAA, the benchmarks and the instructions given to managers, through six approaches from negative screening to impact investing.
In short
- Responsible investing is the umbrella term for ESG principles applied when choosing and owning investments; sustainable investing focuses on sustainability in the process; excluding holdings for ethical reasons is socially responsible investing (SRI).
- Six approaches: negative screening, positive screening (best-in-class), ESG integration, thematic investing, engagement/active ownership, impact investing.
- Exclusions shrink the universe, changing risk and return estimates; managers want benchmarks that reflect the exclusions. ESG integration, seen as a process improvement, is usually expected to beat regular benchmarks.
- Engagement needs clear agreement on voting and dialogue (delegated to the manager, a proxy agent, or the client; individual or collaborative). Thematic allocations bias the portfolio, so their effect on total risk-return must be shown.
- Evidence on ESG and returns is mixed, yet adoption is broad and ESG integration is now mainstream.
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