![](https://si-interactive.s3.amazonaws.com/prod/ai-cio-com/wp-content/uploads/2023/11/16151501/CIO-111521-Institutional-Investors-Incorporating-ESG-Factors-in-Portfolios-1144424874-web.jpg)
Determining how best to incorporate environmental, social and governance factors across the investment portfolio continues to be a challenge for institutional investors, said Bonnie Treichel, founder and chief solutions officer at Endeavor Retirement, during the âSurveying the Landscapeâ session of CIOâs ESG livestream this month.
Not Just a Label
âHow do people really understand this?â Treichel asked. âItâs really hard, because a lot of times, Iâll ask the question about ESG and an investment lineup, and the perspective that I hear is, âWell, if it doesnât say ESG in the title of the fund, or if itâs not named that, or if it doesnât say sustainable, then we donât have ESG in our lineup.ââ
Treichel continued to say that true ESG integration, defined by the CFA Institute as ongoing consideration within an investment analysis and decisionmaking process with the aim to improve risk-adjusted returns, requires more knowledge about a fund or strategy than its title to avoid âgreenwashing.âÂ
âDistinguishing between something that has been greenwashed versus what has actual signs of integration really takes rolling up their sleeves and doing the work,â said Treichel. âI think that is really one of the big problems.â It is key to have âaccess to the tools and resources to be able to get the real issue,â she added.
Sustainable Stock Picking
When it comes to broad equity market investing, ESG stocks are also difficult to define and benchmark, said Witold Henisz, the vice dean and faculty director of the ESG Initiative at the University of Pennsylvaniaâs Wharton School. But that is not necessarily uncommon in the world of equities.
âItâs very hard to ascertain what is an ESG stock in the same way as it is hard to ascertain what is the value stock, what is the growth stock,â Henisz said.
The lines get no clearer when it comes to performance of stocks that include ESG factors, which, again, is not necessarily any different from the rest of the market.
Henisz pointed out that research shows no on-average benefit to using an ESG strategyâbut that can also be said for many other strategies, as no criteria consistently outperforms the market.
No one can provide âthe formula that would help you pick the stocks that would outperform the market over the next five or 10 yearsâit doesnât exist,â Henisz said. âSometimes [it is] value stocks, sometimes growth stocks, sometimes the big industrials, sometimes the emerging markets. ESG is an overlay on top of each of those investment strategies that should allow them to do better.â
Henisz provided the example of the current Russia-Ukraine and Israel-Hamas wars. Fossil fuel stocks are going to outperform, and during that time, ESG stocks, which tend to be more environmentally considerate companies, are going to underperform.
âESG strategies clearly donât underperform the market,â Henisz said. âUnder some periods, under some strategies, ESG strategies are going to outperform the market, and there are plenty of studies that show that for certain industries, certain years and certain datasets. Would you ever want to take that ability away?â
Henisz concluded that definitions and standards will be key to navigating the future ESG landscape: âWe need to have more regulation to root out greenwash and really set a standard that if youâre going to say youâre doing ESG integration, youâve got to meet these criteria.â
Tags: environmental social and governance, Greenwashing, public equities