Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… and Northern offers new ESG analytics tool
Northern Trust has announced a new service to help institutional investors and their managers analyse their portfolios for ESG factors. It’s available through the big custodian’s Investment Risk & Analytical Services (IRAS) group.
According to Serge Boccassini, the senior vice president for global product, accounting and analytics, who has been at Northern for more than 20 years, the firm’s ESG analytics capacities include negative screening of portfolio assets to ensure fund manager adherence to investment guidelines. They can also track against the United Nations-affiliated Global Compact Network principles to compare their clients’ portfolios in that regard.
He said in a phone interview from Chicago last week that: “Every conference I go to for securities servicing or funds management has an interesting speaker or panel on ESG or SRI. Custodians are in an interesting position in this space. We have monetary oversight for our clients and we also have the ability to gather other information for the portfolio. Many people think we just hold assets. That was the original purpose of custodians but now it is much more about collecting and digesting data for our clients. Data is critical.”
The Northern client note said the firm’s reporting provided the data required to improve transparency over a portfolio and gain insights into its composition. This allowed the client to more closely incorporate ESG factors into the investment decision-making process. Potential benefits and uses of the service included:
- To provide evidence of an investment scheme’s ESG scores and exposures
- Use analytics to support an adherence to regulatory requirements
- Monitor changes in a fund’s ESG profile over time
- More closely manage stakeholder concerns and reputational risk, and
- Facilitate ESG discussions with investment managers.
Boccassini said clients could use Northern’s reporting to access a top-down view across a pension plan’s assets on a periodic basis. We combine Northern Trust’s robust asset data with ESG data provided by ‘IdealRatings’. Key features included:
- Overview of ESG metrics – from scores, to business involvement, to UN Global Compact exposures
- Relative comparisons versus a market index
- ESG trend analyses reporting
- Individual manager-by-manager comparison
- Top 10 versus bottom 10 asset-level exposures
- Coverage available for equities and corporate bond assets, and
- Mutual/pooled fund inclusion.
Boccassini said that parts of the ESG analyses were not only environmental. It was much more complex than that. He said that with the new service his firm was hoping, over time, to include analytical tools for private assets, real estate and other unlisted assets, such as water rights, for instance.
G.B.
