Better Together: Policy Benchmarks, Active Equity and ESG

As we’ve previously demonstrated (opens in a new tab), incorporating firm-level ESG characteristics into portfolio construction can preserve, and even improve, risk and return relative to the broad market. Here we follow up by asking how an allocator can integrate ESG considerations efficiently across multiple portfolios in its equity program.

We use a “bottom-up” implementation, a gradual, mandate-by-mandate approach that leaves the policy benchmark unchanged, and a “top-down” implementation, which is a more holistic approach that applies views across all policy, systematic indexed and active mandates. And, we unite several tools — the ESG characteristics of mutual funds, a risk model that incorporates an ESG factor and ESG indexes — to highlight how indexed and active management can be complementary.