It's time to discuss an under-commented on ESG issue: tracking error. We have clients with ESG fund investments, typically because they start from the premise that they want solutions that (broadly) match their belief systems. The key word above is "broadly", because the ESG approach chosen by the manager is unlikely to match that of the client closely, but to be fair, it often incorporates additional practices that clients aren't opposed to. However, the direction of travel for many ESG strategies in recent years is only in one direction, and that is to do more. The clearest example is an ever-expanding list of exclusions, which are not always the subject of prior consultation. Managers can help manage this disconnect with more extensive reporting to clients, including informal ESG-screened benchmarks, attribution analysis, and information about the components of their "active share" over time. All good stuff. But a reasonable question remains: at what point has the fund your client invested in changed so much it is no longer fit for their purposes? #ESG #investing # #benchmarking
Mathew Jeremy
9mo
Quite right Andrew. Fit for purpose both quantitatively as well as qualitatively?
Independent Investment, Capital and Risk Advisory
9moA simple starting suggestion is to avoid ESG and other custom benchmarks - test the thesis versus the S&P 500 or equivalent generic benchmarlk