One Institutional Investor’s Approach to Integrating ESG in the Investment Process

Abstract

This article intends to share one institutional investor’s approach to integrating environmental, social, and governance (ESG) factors in managing and overseeing the assets of the United Automobile Workers Retiree Medical Benefits Trust. This approach takes a comprehensive view of material, ESG-related factors that influence corporate financial results, which ultimately influence the investment performance of the Trust’s portfolio. Over the past couple of decades, the number of investors integrating some form of responsible investing has grown significantly. Nevertheless, a portion of the investment community still does not pursue ESG as part of the investment process. As with any decision in managing a pool of assets, one must be clear on governance structure, investment beliefs, investment objectives, risk tolerances, regulatory environment, and other considerations in designing an investment strategy. All of these important elements and dynamics are critical in designing and implementing an investment policy and strategy that best fits the asset owner’s circumstances. Hopefully, by sharing one investor’s perspective, this will prove useful for all investors as a data point for considering the role and approach of responsible investing in an investment program.

TOPICS: Portfolio management/multi-asset allocation, ESG investing, portfolio theory, portfolio construction

Key Findings

• • Investors should consider environmental, social, and governance factors as a complement to traditional fundamental analysis of corporate financial results because this more comprehensive view might uncover unintended or mispriced risk.

• • Integrating an ESG evaluation tool in an intuitional allocator’s manager research and selection process can give additional information as to how the investment manager accounts for risk beyond the financial statements of a corporation.

• • Although over 86% of the constituents of the S&P 500 Index provide a report on their sustainability efforts, further standardizing reporting and disclosure will assist investors in understanding how decisions by the corporations can affect financial results.