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FALL 2020
 Table 1: CFA Institute’s proposed ESG standards matrix
ESG-related features
ESG integration:
Explicitly considers ESG- related factors that are material to the risk and return of the investment
ESG- related exclusions: Excludes securities based on ESG-related activities, practices
or business segments
Best- in-class:
Invests in companies that outperform peers on ESG performance metrics
ESG- related thematic focus: Invests in sectors or companies expected to benefit from long- term macro ESG trends
Impact objective:
Seeks to generate a positive, measurable social or environmental impact
Proxy voting, engagement and stewardship: Uses rights and ownership to influence companies’ behaviours
“I want to know that the ESG factors that are material to the risk and return of my investments are explicitly considered.”
“I don’t want to violate my personal beliefs or the mission, principles or beliefs of my organization.”
“I want to make investments that I believe have relatively fewer negative effects, and more positive effects, on the people and things I care about and the world in which I live.”
“I want to capitalize on investment opportunities related to long-term environmental or social trends.”
“I want to invest in specific solutions that intend to make a measurable contribution to a defined environmental or social need, problem or goal.”
                 often scores are updated and how they’re vetted — the same way they research company balance sheets and operations, he says.
“There is almost no shortcut for an advisor who wants to use an ESG [fund] other than looking at the index con- struction methodology and at the portfolio, and then ask- ing if that aligns with the value system and the way they want to invest,” Straus says.
While there is discrepancy between different pro- viders’ ESG scores, Brown says it’s up to advisors to understand the methodology, come up with their own approach and follow it consistently. With clients, she defines which companies stay in portfolios and which don’t meet the mark based on the providers’ scores.
But ratings are only one side of the coin. Advisors also need to understand what their clients really want before they recommend a product. This means identifying which elements of responsible investing are most important: avoiding risks from human rights scandals, supporting companies with strong employee diversity or investing in clean energy — or all of the above.
In response to such concerns, the CFA Institute is developing a disclosure standard for fund companies. The institute has a standard out for consultation (the initial ver- sion is expected to be ready in May 2021) that defines six ESG-related features found in products, and identifies five common client needs when it comes to ESG investing. The idea is to develop a matrix for advisors to match client needs to product features (see Table 1).
The standard will require asset managers to disclose specific information about ESG products. Once asset managers submit a product to the standard, they must comply with the disclosure requirements.
“It’s hard for clients sometimes to articulate their needs,” says Chris Fidler, the CFA Institute’s senior dir- ector, global industry standards. “They might not know
Funds that integrate ESG factors, or that seek to have a positive impact in those areas, are often maligned
as underperforming. Ian Tam, director of investment research for Canada at Mor- ningstar, said this dates back to early approaches based around screening
out companies, but underperformance is no longer true. Mor- ningstar’s global quan- titative research going back 10 years found there isn’t “a signifi- cant risk premium or discount for investing in companies that have better ESG scores,”
he said. “There really is no known perform- ance upside or down- side from investing with an ESG lens.”
exactly what they want until they see it.”
Product manufacturers can describe a product’s fea-
tures, benefits and limitations, he says, but they can’t ensure an investor uses the product in the appropriate way. “That matrix will be the translator between a client’s needs and the benefits of a product.”
Without a common standard, there’s plenty of digging for advisors to do. When building portfolios, Brown starts by identifying funds that identify as responsible to fill out a specific asset allocation, such as U.S. equities. She exam- ines the asset manager’s ESG reports and might book meetings with portfolio managers to learn about share- holder engagement and the underlying investment thesis. She tries to build portfolios with ESG layered in across asset allocations.
Brown, a member of the Responsible Investment Association’s board, used to use passive or best-in-class funds but has moved to mostly active funds that use ESG integration at every step of portfolio construction.
“It takes a deeper dive, but that’s our role as advisors, where we’re getting paid to do a deeper dive,” she says. “We do it on the financial side; we need to do it on the RI side as well.” AE

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