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Integrating ESG into the Investment Process

In recent years, many institutional investors have been increasingly recognizing that the long-term sustainability of their investments matters. Environmental, Social and Governance (ESG) factors are becoming important considerations for investors to focus on given their influence on a portfolio's risk and return profile. Some asset owners are starting to embrace the concept of "Universal Ownership", where they see the long-term exposure to the whole economy through their portfolio as requiring specific investment actions. Mitigating risks due to exposure to ESG factors and dealing with externalities in order to produce higher sustainable long-term returns has become an integrated part of the portfolio management process for many investors/asset owners.
The aim of this paper is to provide a framework for integrating ESG considerations into the investment process of mainstream institutional investors. In particular, it introduces a portfolio analytical concept that aims to measure how well ESG factors are integrated across the entire portfolio and that can be used to set quantifiable objectives for improvement.