March’s madness is over, but if you’re a socially responsible investor, you may still have a bracket to complete.
If you’ve ever filled one out for the NCAA championship tournament, you know that assessing college basketball teams is a tall task. There are a host of variables to consider—win-loss record, points scored, points given up, strength of schedule and conference, and so on. And even once you’ve identified the important data points, you still have to decide how to weight each one. In the end, you come up with a rank based on multiple metrics and apply that framework to each team in the tournament.
This approach is exactly how analysts derive a company’s ESG (environmental, social, and governance) score; first you need to identify the relevant data points, or indicators. These include:
You may decide some indicators are more relevant for some companies than for others. For example, perhaps having an effective environmental waste program is important only for those companies engaged in manufacturing a physical product. You must also decide what weight to place on each indicator—for example, do you consider each to be equally important, or does it differ by industry?
The end result is your ESG score for a specific company. Just like the NCAA tournament, however, it’s important to keep in mind that an ESG score is based on data known at the time—and not necessarily a reflection of what will happen as the games play out.
Potential Parametric Solution:
For more than 15 years, Parametric has been offering a robust and continually evolving menu of ESG screens and licensed indexes, giving investors a wide range of portfolio design choices. These include a series of risk-controlled, index-like exposures that can be used as a core equity portfolio allocation while aligning with common responsible-investing themes.
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