Finding Clarity in ESG Investing. (Really.)
A proprietary ESG scoring methodology aims to end the chaos around ESG data.
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.”
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.
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