Evolution of Socially Responsible Investing

As socially responsible investing has become more popular, the industry has matured. ESG data has become more diverse and robust, ESG data has moved from a screening technique to an alpha source, and portfolio construction techniques have become more sophisticated.  Concinnity believes it is at the cutting edge of this evolution.  See the flow chart below to follow the evolution of SRI techniques.

Blacklists

Eliminate individual stocks from a portfolio because of bad behavior or cause

Examples: Exxon Mobil (Valdez accident), Phillip Morris (selling cigarettes), Nike (child labor)

Negative Screens

Eliminate entire industries because of behavior or cause

Examples: no tobacco companies, no coal companies, no gun companies

Negative Factors

Rank all companies by a negative factor, then avoid the worst companies

Examples: highest carbon footprint, highest governance risk

Alpha Factors

Use ESG factors and scores  as an alpha source in portfolio construction

Examples: MSCI, TruCost, Sustainalytics, RobecoSam

Industry Specific Materiality

Use ESG factors weighed differently in each industry based on materiality

Examples: Governance scores are more material in Banks,

Environmental scores are more material in Energy/Materials

Concinnity Process

Concinnity creates proprietary ESG scores grouped into stakeholder categories

Scores for each stakeholder category are weighted differently per industry

A valuation overlay is applied using standard financial metrics

Final portfolio is risk balanced to eliminate potential sector, size, and style bias