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Welcome. This website is intended solely for the use of institutional investors, consultants and other professionally recognized financial intermediaries in specific countries. Intech Investment Management LLC (“Intech”), is an investment adviser registered with the United States Securities & Exchange Commission. Intech is not permitted to offer products and services in all countries. It is the responsibility of prospective investors to inform themselves of and to observe all applicable laws and regulations of any relevant jurisdictions, including the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares or securities, and any foreign exchange restrictions that may be relevant thereto. The products and services referred to in this website are not offered to any person or entity in any jurisdiction where the advertisement, offer or sale of such products and services is restricted or prohibited by law or regulation or where we would be subject to any registration or licensing requirement not currently held by Intech or our affiliates. If Intech does not offer a website for your country, please visit www.janushenderson.com.

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This Website is intended solely for the use of wholesale clients in Australia and their professional consultants and investment advisers and is not for general public distribution.

This material on this website is not intended for distribution to, nor should it be relied upon by, retail clients. If you are a retail or individual investor, then please leave this Website.

Intech is permitted to provide certain financial services to wholesale clients in Australia pursuant to an exemption from the need to hold an Australian financial services licence under the Australian Corporations Act 2001. Intech is regulated by the Securities Exchange Commission of the U.S. under U.S. laws, which differ from Australian laws.

The words ‘Intech,’ ‘we,’ ‘us’ or ‘our’ used herein refer to Intech Investment Management LLC (“Intech”), an investment adviser registered with the United States Securities & Exchange Commission, and ‘you’ or ‘yourself’ may refer to an individual, Independent Financial Advisor, consultant, company, or other entity visiting this website. This website is issued by Intech Investment Management LLC (“Intech”).

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This website is intended only for wholesale clients (as defined by section 761G of the Corporations Act 2001) in Australia and their professional consultants and investment advisers who are who are knowledgeable and experienced in the financial services market and in investment products of this nature.

Should you proceed to access this Website, you will be representing and warranting that you are a “wholesale client” as defined by section 761G of the Corporations Act 2001. The information is not authorized for use in a jurisdiction where distribution is not authorized and is not intended for distribution to retail clients.

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As more investors embrace the importance of incorporating environmental, social, and governance (ESG) considerations into their portfolios, there has been growing interest in managing the potential performance trade-offs that can often be associated with capturing enhanced ESG characteristics.

Investors tend to favor one of two typical approaches to implementing ESG investment strategies: stock-driven and portfolio-driven. Many investors continue to rely on stock-driven ESG exposures when integrating ESG considerations into portfolio construction; however, focusing on portfolio-level exposures appears to be a more efficient approach.

 

Stock-driven exposures

Portfolio-driven exposures

This approach limits the investment universe relative to a benchmark based on specific stock-level ESG ratings. It may not use overall portfolio-level ESG constraints or exposures in the process; instead, it relies on excluding companies with the least favorable ESG ratings or overweighting those with the most favorable ratings as a way to meet an investor’s sustainability objectives.

This approach may also incorporate stock-level ESG ratings, but it places emphasis on targeting ESG outcomes at the portfolio level, allowing for a larger initial investment universe. The portfolio-driven approach boosts portfolio-level ESG characteristics above the benchmark, commensurate with investor objectives, while adapting the portfolio to manage the resulting impact to performance and risk.

 

Stock-Driven ESG Approaches Invite Challenges

Focusing on stock-level ESG exposures may intuitively seem like the most straightforward way to improve a portfolio’s ESG scores. Yet, our research shows that a stock-driven approach alone can come with steep trade-offs that may significantly limit a portfolio in several ways – especially when the approach relies on excluding a material number of low-rated stocks.

We find three key challenges with stock-driven ESG implementations:

  1. Excluding stocks reduces the investment universe, which tends to restrict overall return potential. Fewer names to choose from generally translates into fewer ways to add alpha.
  2. Working with fewer names reduces diversification potential, and increases overall risk relative to the portfolio’s benchmark.
  3. Stock-exclusion approaches may not consistently maintain a portfolio’s ESG profile. This potentially introduces a level of unintended exposure variability, the degree of which may grow as the number of exclusions increase. For example, the consistency of an ESG boost resulting only from stock exclusions may be lower and less consistent than expected, as the improvement of the desired ESG metrics relative to the benchmark is unmanaged and can be quite uneven.

Instead, a more practical approach appears to begin by defining the investor’s ESG investment goals and then focusing on how best to integrate the corresponding constraints based on the overall desired portfolio attributes. In other words, begin with the end in mind. We believe this method offers much greater portfolio control and helps better manage the trade-offs between ESG and risk-reward outcomes to pursue stronger outcomes for both.

Targeting ESG Outcomes at the Portfolio-Level

In our recent research paper, Constructing ESG Portfolios with Non-ESG Data, we highlighted a method to target portfolio-level ESG outcomes with greater efficiency, scale and dependability without directly relying on stock-specific ESG data. We merely adjusted portfolio-level risk exposures, such as sector and country weights. You can see the results for the overall ESG score presented in that research below (Figure 1). We also presented individual environment, social, governance and carbon proxies in the original paper.

“...this method offers much greater portfolio control and helps better manage the trade-offs between ESG and risk-reward outcomes to pursue stronger outcomes for both.”

Although this was a very simple experiment, it offered an important proof of concept: Investors may achieve meaningful and consistent ESG portfolio tilts over benchmark scores by adjusting portfolio-level exposures that capture dominant and persistent characteristics inherent in traditional ESG evaluations.

Fig 1 Boosting ESG Scores by Adjusting Only Portfolio-Level Exposures-1

Need the Evidence?

We’ve written a research paper on how a more sophisticated application of a portfolio-driven ESG integration might capture ESG outcomes similar to those produced by a stock-driven exposure approach. Our goal was to understand how your ESG implementation choice – portfolio-driven exposures versus stock-driven exposures – could affect an active, non-ESG strategy with a history of generating alpha. Download it here.

Boost ESG Scores and Preserve Risk-Reward Results? Find Your Win-Win ESG Investing Proposition Learn More

 

The information expressed herein is subject to change based on market and other conditions. The views presented are for general informational purposes only and do not purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. All content is presented by the date(s) published or indicated only, and may be superseded by subsequent market events or other reasons.

Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal and fluctuation of value. Information that is based on past results or observations is not necessarily a guide to future results, and no representation or warranty, express or implied, is made regarding future results.

Index returns do not reflect transaction costs or the deduction of fees. It is not possible to invest directly in an index. 

Investments are subject to certain risks, including currency fluctuations and changes in political and economic conditions, which could result in significant market fluctuations.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein, if shown. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This material has not been approved, reviewed, or produced by MSCI.

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