ESG Materiality: A North Star for multi-asset investors [2023]

ESG Materiality: A North Star for multi-asset investors [2023]

Though there is plenty of debate related to the term “ESG” lately, when we focus on the substance of specific, investment-relevant environmental, social, and governance issues, we find a common ground of common sense. When we move from the jargon of ESG analysis to the substance of strategic issues, the rhetoric at both extremes tends to recede.

The concept of financial materiality serves as a “North Star” that can guide activity across asset classes. Illuminating this concept, Putnam experts in equities, fixed income, and asset allocation have produced a comprehensive exploration of ESG materiality across asset classes. These insights can help investors navigate the complexities of implementing ESG analysis across different security types, investment universes, and portfolio goals.

We believe that understanding these commonalities and distinctions can inform and improve consideration of financially material ESG issues. Our paper identifies areas of philosophical alignment as well as strategic differences.

Philosophical alignment

  • Investors are universally interested in generating strong risk-adjusted returns with appropriate levels of risk.
  • To pursue their goals, investors incorporate analytical frameworks that reflect investment relevance and material financial considerations.
  • Research that aims to improve risk-adjusted returns is typically context-specific and forward-looking.

“Tailored implementation of ESG analysis across asset classes is appropriate, and perhaps even essential.”

Strategic differences

  • The nature of individual securities. Security structure, time horizon, and data availability all vary by asset class. Additionally, there are important differences within individual asset classes. All of these factors imply that a tailored, context-specific, and forward-looking approach to ESG analysis is warranted.
  • Composition of the investment universe. The number of issues and issuers, total market value, pace of new issues, and trading volumes all vary by asset class. These differences highlight the need for research and analytical processes that are designed to account for the characteristics of varied investment universes.
  • The goals, style, and methods of the investment portfolio. Investment portfolios have varied purposes and client requirements that are reflected in processes like security selection, trading strategy, and benchmarking. Again, this variety requires ESG considerations that are attuned to the specific investment setting and portfolio goals.

Differences in security types, investment universes, and portfolio designs indicate that tailored implementation of ESG analysis across asset classes is appropriate, and perhaps even essential. Especially for multi-asset investors, we believe it is important to consider and incorporate these ideas into process development and decision-making.

Read ESG’s North Star: A guide to financial materiality for multi-asset investing

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