Effectively managing risks in an ESG portfolio

Abstract

Environmental, social and governance (ESG) integration into active and passive portfolios is now a key part of the fast-growing area of sustainable investing. As portfolio managers integrate ESG into their strategies, they add new components of risk that are in addition to the traditional financial risks familiar to chief investment officers (CIOs) and risk managers. In this paper, the author reviews ESG risks from the practitioner’s point of view, including risks found in ESG data itself that stem from the definition, collection and aggregation process. The author then discusses the portfolio characteristics associated with integrating ESG data as well as the challenges in building tools to measure risk and report on attribution. Next, he looks at connections between screening and reputational risks and the beneficial role that engagement can play. Finally, he discusses tail risks and reviews the role that physical climate risk plays in managing portfolios.