Embedding ESG Data into the Investment Process

Arun Kelshiker

20 years: Asset management and stewardship

In this video, Arun explores how ESG data is integrated across the investment process from research and valuation to portfolio construction and risk management. He explains key frameworks like the UN PRI, highlights real-world examples from firms like Manulife and Invesco, and discusses the tools and metrics investors use. He also addresses the challenges around ESG data transparency and ratings consistency, offering insights into how investors can navigate these issues to make smarter, more sustainable decisions.

Sustainability Measurement

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Embedding ESG Data into the Investment Process

14 mins 12 secs

Key learning objectives:

Understand how ESG data integrates into investment processes across equities and fixed-income strategies
Outline methodologies and tools used by investors and data providers for ESG integration
Identify challenges related to ESG data, such as transparency, methodological biases, and reliability

Overview:

The integration of ESG data has transformed sustainable investing, driven by frameworks like the UN PRI and methodologies from ESG providers such as MSCI and Sustainalytics. ESG data informs every stage of investment, from research and security valuation to portfolio construction and risk management. Case studies from Manulife, RBC, and Invesco highlight innovative approaches to incorporating ESG metrics into equity and credit strategies. Challenges persist, including rating transparency and biases, but ESG data helps investors assess risks, align portfolios with sustainability goals, and enhance returns. By embedding ESG analysis into processes, investors can better navigate the complexities of sustainable finance.

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Summary

What is the UN PRI’s framework for ESG data integration?

The UN Principles for Responsible Investment (PRI) outlines a five-part ESG integration process: responsible investment policy, governance, investment process, stewardship, and monitoring/reporting. The PRI, alongside the CFA ESG Framework, emphasises ESG research, security valuation, and portfolio-level integration. These elements ensure that ESG considerations are incorporated holistically, addressing risks and opportunities while aligning with sustainability goals.

How do ESG frameworks inform research, security valuation, and portfolio construction?

ESG research includes materiality frameworks, SWOT analysis, and monitoring tools, informing equity and fixed-income valuations through scenario analysis and risk assessments. Portfolio-level integration involves aligning ESG profiles with benchmarks, strategic/tactical asset allocation, risk management, and stress-testing. These frameworks ensure investments reflect sustainability values while managing risks and maximizing returns.

How is ESG data embedded into portfolio-level risk management and analysis?

Investors utilise ESG data to assess portfolio risks via exposure metrics like Weighted Average Carbon Intensity (WACI) and controversy scores. Tools aggregate ESG datasets to build consensus rankings, enabling stress-testing and scenario analysis. This macro-to-micro approach helps quantify risks, align portfolios with sustainability benchmarks, and anticipate shocks.

What challenges exist in ESG data transparency and consistency?

Challenges include methodological biases, low correlation among ESG ratings (average correlation ~0.6 compared to ~0.9 for credit ratings), and reliance on dominant providers. Divergences in scope, measurement, and weighting complicate accurate assessments. Despite these issues, evolving tools and frameworks continue to improve the reliability of ESG data for investors.

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Arun Kelshiker

Arun Kelshiker was formerly the Head of Asset Allocation and Portfolio Strategy at Standard Chartered Bank and part of the bank's Global Investment Committee, where he provided investment advisory and multi-asset portfolio solutions. His focus is now with Cambridge Sustainable Investment Partners, which draws its expertise from the Resilience and Sustainable Development Centre at Cambridge University. He is also a university lecturer at the Frankfurt School of Finance and Management and is Vice Chair of the CFA UK's Inclusion and Diversity Committee and its Investment Committee.

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