For example:

  • A negative exclusion approach may remove certain industries/sectors from investment consideration but cause increased tracking error versus market weighted benchmarks.
  • A sustainability-themed investment may concentrate risk in certain sectors.
  • Impact-type investors argue that the most effective way to get companies to address social or environmental problems is to become an “activist” shareholder. Progress is achieved by engaging with management to set goals and regularly disclose progress.

Whatever the approach, if an ESG product is not properly diversified, its application typically is limited.



Large institutional investors dominated the early stages of ESG investing because they possessed the requisite expertise and governance protections of well-resourced investment committees. Typically, they invest through separately managed accounts (SMAs) or overlays exhibiting limited asset diversification. Such account structures are not workable, by contrast, for retail and advisor channels, or for institutions that lack committees of investment experts, due to asset diversification requirements and account size thresholds. Herein lies the market opportunity to create a scalable, performance-driven ESG investment vehicle.

To facilitate product development applications, index providers have started to rely on key performance indicators (KPIs) reported by public companies in their regulatory filings. KPIs are quantitative and qualitative metrics that demonstrate how effectively a company is achieving its business objectives, which often include environmental, social or governance considerations.

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