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How to Engage ESG in More Meaningful Ways How are deeper ESG datasets leading to sharper tools for investors?
BY Mona Naqvi

The outperformance of funds that take environmental, social and governance (ESG) issues more seriously than their peers has reinforced why investors might want to integrate these factors into portfolios via the type of tools that S&P Dow Jones Indices has developed.

Encouraged by evidence of the materiality of ESG issues during the Covid-19 led volatility, there is greater appetite for sustainable themes in investor portfolios to align investments with one’s values and potentially generate higher risk-adjusted returns. At the same time, fuelled by greater transparency over how companies act and behave, and also spurred by trends in public opinion towards issues that matter to society as a whole, investors are seeking ways to leverage data and research to gain greater exposure to ESG factors.

Amid these trends, Mona Naqvi, Head of ESG Index Strategy for North America at S&P Dow Jones Indices (S&P DJI), spoke with AsianInvestor to explain the importance of financial materiality and other key ways to assess ESG, to help it be a core building block in portfolio construction.

AsianInvestor: How did market volatility due to COVID-19 impact how asset owners view ESG factors?

Mona: The pandemic has underscored the relevance of certain ESG issues - such as public health, worker health and safety, and supply chain risk management, for example - for investor portfolios and has accelerated what was already a growing trend in Asia — and beyond — toward greater allocations to ESG funds.

Aside from the growing body of academic and institutional research underpinning the financial materiality of ESG investing, the outperformance of many ESG funds and benchmarks over the year-to-date—including the new S&P ESG Index Series—has helped to dispel the myth of an ESG vs. performance trade-off that previously plagued the widespread adoption of sustainable investing.

That mind-set, common among mainstream investors, partly exists due to archaic forms of values-based investing, such as SRI, from many decades ago that to some extent did imply less portfolio diversification and therefore the possibility of lower investment returns. However, the emergence of new data, combined with more innovative index construction approaches designed to closely replicate the risk-return profile of an underlying benchmark, mean that investors now have a much more expansive toolkit to integrate ESG into the core of their investment portfolios without necessarily having to sacrifice returns. Indeed, as the recent outperformance suggests, these types of investment approaches might even offer a pathway for more resilient and differentiated returns.

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