A Blueprint for Integrating ESG into Equity Portfolios

Volume 16, No. 1, 2018
Jennifer Bender, Todd Bridges, Chen He, Anna Lester and Xiaole Sun

Environmental, social and governance (ESG) offers a source of new and potentially valuable information for investors, impacting both potential returns and risk. Growing data availability has created the opportunity to integrate ESG into equity portfolios for a variety of investment processes, for both indexing and active management. In this paper, we provide an overview of the current data landscape and several popular methods for integrating ESG. A main challenge is that ESG data collection and aggregation methods can vary significantly across providers, leading to very different ratings for the same company. If the data issues are properly addressed, integrating ESG has important potential benefits for investors. Our “blueprint” lays out a path for any investment manager seeking to understand how ESG fits into their investment process.