How to measure and improve a portfolio’s contribution to your own sustainability goals?
Sustainable investing is currently the main theme in the investment industry. Sustainability of a company or a stock portfolio is often measured in relation to the well-known ESG criteria (Environmental, Social and Governance). Several data providers (such as Refinitiv, Sustainalytics and Moody’s) publish E, S and G scores for thousands of firms.
But what if your sustainability goals differ from those three broad definitions of E, S and G? Many asset managers and pension funds formulate their own sustainability goals and criteria, which are often more narrow and specific than E, S and G. For example, some Dutch asset managers would like their investments to contribute to clean oceans and clean water, given long relationship of The Netherlands with water. Others would like to pay attention to gender equality or education.
With existing sustainability scoring data, is it possible to measure a company’s or a portfolio’s contribution to such specific goals, and if yes, then how? This is the question we answer in this paper. For that, we use the example of UN Sustainable Development Goals. We describe how to choose sustainable portfolios in a diversified way and examine whether choosing stock portfolios according to specific sustainability goals significantly compromises their financial performance. Finally, we draw parallels between US and European firms and look at the similarities and differences in these two regions