ESG Considerations in Portfolio Planning and Construction

Environmental, social and governance factors are collectively referred to by the acronym “ESG”. ESG integration is the practice of considering environmental, social, and governance factors in the investment process, and can be implemented across all asset classes, including equities, fixed income, and alternative investments. ESG issues can be sub-divided into 3 main groups:

  • Environmental issues: climate change, pollution, deforestation, etc.
  • Social issues: customer satisfaction, gender and diversity, labor standards, etc.
  • Governance issues: bribery and corruption, executive compensation, lobbying, etc.

Investors may exclude or engage with companies in accordance with these issues, or
ask their asset managers to consider these issues in their investment process. For example, an investor might not want to buy polled-investment vehicles that own oil & gas and/or military equipment stocks.

Returns Associated with ESG Considerations

The effort and costs associated with limiting the investment universe as part of sustainable investing suggest a negative impact on investment returns. However, there are some benchmarks available that reflect many commonly excluded companies or sectors.
Academic research remains mixed on the impact of ESG factors on portfolio returns.

Reading 54 LOS 54h:

Describe how environmental, social, and governance (ESG) considerations may be integrated into portfolio planning and construction


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