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Socially Responsible Investing: What’s in Your Portfolio?


So you’ve added some ESG criteria to your portfolio…but what exactly did that do to your holdings? How does your portfolio compare to your reference benchmark? What’s more, is the result what you intended? And does it truly further your responsible-investing goals?

These types of questions are at the top of many investors’ minds, and as a result we’ve seen an uptick in demand for detailed responsible-investing reporting. Reporting is useful on many levels, providing insight into measurement, broader context, and mission relevance. Let’s take a closer look at each.

Measurement: Do you know the outcome of your responsible-investing choices?

Let’s say you’ve decided to screen for public companies that have a minimum number of women on their boards. How did that influence your portfolio’s holdings? Measurement should be clear and easy to understand. You should be able to easily see that, for example, “100% of the companies I own have at least one woman on the board” such that there’s no confusion around the criteria used (“at least one woman on the board”) and what’s being measured (“the companies you own”).

Many investors choose to add multiple criteria to their portfolio screens, in which case there may be many data points to report on. In these cases reporting can help investors gain transparency into how the criteria interact with one another. For example, you may learn that adding criteria around carbon emissions decreases the number of the companies with diverse boards.

All this said, measurement shouldn’t overstate reality. Applying criteria around the number of women board members doesn’t necessarily equate to “100% of the companies I own are committed to increasing board diversity.”

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Source: Parametric

Context: What’s in your frame of reference?

Investors choose a specific benchmark—whether the S&P 500® Index, the MSCI KLD 400 Social Index, or the MSCI EAFE Value Index—very intentionally. Typically that benchmark indicates a performance target, but it also serves to define the investable universe. Knowing that the average ESG score of the companies in your portfolio is 86 is a key piece of information. Knowing that the average ESG score of the investable universe is 63 helps put the portfolio’s score into broader context.

Context can also help reveal how prevalent, or not, an issue is in public equities. For example, reporting may reveal that the benchmark index you’ve chosen may contain no firearm manufacturers. If you’re an investor who feels strongly about gun control, this may influence how you decide to tackle the issue. You may come to the conclusion that pursuing change via public policy, rather than divestment, is a more fruitful path.

Relevance: Are your reports tailored to your responsible-investing goals?

If your aim is a fossil-free portfolio, but the reporting tells you how many gambling companies you own, this might be interesting at best but not very meaningful. 

Yet even this can serve as a crucial feedback loop for investors—the initial intent may have been to divest from companies that own fossil-fuel reserves, but upon reviewing the portfolio’s holdings you might realize you’d in fact prefer to divest from fossil fuels in any capacity. In this case your portfolio’s ESG criteria might need to be rethought and redefined.

The bottom line

Responsible-investing reporting is a common investor request. When done correctly, it serves as a crucial feedback loop, provides broad context and deeper insight, and may even influence the strategy an investor pursues. So what’s in your responsible-investing portfolio?

Potential Parametric Solution

For more than 20 years, our Responsible Investing capability has offered a robust and continually evolving menu of ESG screens and licensed indexes, giving investors a wide range of portfolio design choices and the robust reporting to help them understand the impact their choices make. In addition, our proxy-voting guidelines follow corporate-governance best practices to safeguard shareholder capital, and they consider the relevant environmental and social implications of management and shareholder proposals.

Martha Strebinger

Martha Strebinger, CFA – Senior Investment Strategist

Ms. Strebinger is responsible for assisting in the continued evolution of Parametric’s Responsible Investing and Custom CoreTM strategies. She earned a B.S. in Human Biology, Health & Society from Cornell University. She is a CFA® charterholder.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss.