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Finding Clarity in ESG Investing. (Really.)

A proprietary ESG scoring methodology aims to end the chaos around ESG data.

Finding Clarity in ESG Investing

Finding Clarity in ESG Investing

From the first moments ESG entered the lexicon of investing the relationship between topic and industry has been fuzzy to say the least. For starters, there’s a lingering lack of understanding around what ESG actually means. And data consistency? Fuggedaboutit.

“The growth and continued interest around ESG investing has created a plethora of different ESG data providers and different frameworks, and all of those have different approaches, different levels of information, and a different level of transparency,” says Julie Moret, Global Head of Sustainable Investing and Stewardship, Northern Trust Asset Management. “Investors are still stuck seeking clarity around what to measure, how to measure, and how to implement their findings during portfolio construction.”

“The issue isn’t underlying data itself,” says Michael Hunstad, PhD, Head of Quantitative Strategies, Northern Trust Asset Management. “Rather, different scoring methodologies put different emphasis on certain criteria over others. The result is a company that potentially could score very highly using one methodology, but poorly using another. That creates a lot of mistrust among ESG scores in general. More and more though, the industry is waking up to the idea that we need a framework emphasizing issues that are financially material.”

One solution to this challenge might be to create and implement a proprietary ESG analysis that provides a score for investible companies. That’s exactly what Northern Trust Asset Management has done with its new ESG Vector Score, which provides a measurement across companies through a sustainability lens. It is an industry first in that its development combined the Sustainability Accounting Standards Board’s (SASB) framework and the Task Force on Climate-Related Financial Disclosures’ framework, not just on climate, but across environment, social, and corporate governance pillars using SASB’s 77 industry specific standards.

“The process by which we’ve created the ESG Vector Score provides a more comprehensive view of risk that looks at a company’s historical score, how that company has scored relative to its peers, and a forward-looking score,” says Moret. “What we’re measuring and how we’re measuring it acts as a quantifiable measurement tool with a clear, intentional mechanism by which it can be incorporated into portfolio construction.”

“By putting emphasis on ESG issues that are financially material we can craft a portfolio to achieve as much performance as we possibly can while mitigating as much of the financial risk as possible. With the ESG Vector Score, we’re addressing material issues and the risk-return profile at the same time,” says Hunstad.

What was formerly a bit of a scrum around ESG investing is now poised to move on to something resembling the more precise way the rest of the investment landscape is approached.

“The point of ESG investing is not only to do good, but for the portfolio to perform well, too,” says Andrew Stoll, Director, Insurance Practice Lead, Northern Trust Asset Management. “We seek investment returns and come at it from a standpoint of investment first, followed by what fits our ESG preference. The ESG Vector Score helps us achieve that from a risk-return perspective.”

Learn more about the Northern Trust Asset Management ESG Vector Score.

Northern Trust Asset Management (“NTAM”) is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

The content provided herein is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve as the primary or sole basis for investment decision making as there may be other factors to consider. You should conduct your own due diligence and analysis based on your specific needs.

This communication is sponsored by NTAM and prepared by Institutional Investor. It is for your information only and is not an offer or solicitation for the purchase or sale of any security nor a recommendation or endorsement of any security or issuer. NTAM makes no representation about the accuracy, completeness, or timeliness of this information.

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An Environmental, Social and Governance (ESG) strategy’s use of ESG factors and screening process may screen out certain companies and industries and/or affect exposures to certain companies or industries. An ESG strategy utilizes ESG analytics as a risk mitigation tool not as an alpha driver and may cause the strategy to forego certain investment opportunities. Investors can integrate ESG data to create a more holistic view of risks and opportunities — resulting in more informed investment decisions and resilient portfolios.

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