Stockholm (NordSIP) – As ESG investors look forward to 2024, finding ways to overcome the challenges of investing sustainably will be foremost on their minds. Given the multitude of research on ESG Investing and its effects on returns, methodological issues, the complexity of ESG indices, limited data availability, and a complex political landscape, sustainable investors face an uphill struggle.
In an attempt to address these concerns last year, Impact Cubed, a provider of ESG impact data and analytics solutions, launched Smart ESG, a next-generation portfolio optimisation tool that seeks to offer investors bespoke sustainable investment solutions. The Introducing Smart ESG: A Revolutionary Approach to Sustainable Investing report announcing the tool’s launch, uses a range of case studies and consultation findings to purportedly demonstrate how this tool allows investors to strike a balance between maximising ESG impact and minimising tracking error.
According to Impact Cubed, the portfolios created through Smart ESG “consistently outperform existing benchmarks and indices, in terms of both ESG impact and tracking error, reflecting our commitment to hasten the capital shift towards a more sustainable future.”
Mitigating Tracking Error as ESG Impact Increases
According to Impact Cubed’s investor survey, sustainable investors focus on one of two types of requirement: tracking error vis-à-vis the performance of a benchmark or achieving specific ESG goals.
“For some market participants, particularly among passive fund managers and institutional investors, tracking error efficiency is of paramount importance. These parties often operate within a tight risk management framework, which necessitates a keen focus on minimising deviations from their benchmark. However, not all investors share this perspective. Some clients, particularly in the wealth and active management space, are more benchmark agnostic. For these investors with more concentrated portfolios, achieving specific investment objectives or aligning with particular ESG goals might take precedence over closely tracking a benchmark index,” the report explains.
“Smart ESG can adjust to the varying requirements and preferences of different investors,” the report argues. It allows interested investors to control the tracking error and achieve ESG gains, while those willing to tolerate a higher tracking error can achieve higher levels ESG improvements. “This flexibility allows investors to make conscious decisions based on their unique risk tolerance and ESG priorities,” the report continues.
In one case study, Impact Cubed shows that its Smart ESG portfolios can improve sustainability performance, such as reductions in carbon emissions, without increases in tracking error.
The report also discussed other case studies where the use of Impact Cubed’s Smart ESG had facilitated an additional 30% reduction in portfolio carbon intensity, 30% reduction in water usage intensity and 75% reduction in waste generation, versus other existing Paris-aligned investment solutions, while improving portfolio alignment with the UN Sustainable Development Goals (SDGs).
Impact Cubed’s Smart ESG is but one of the latest tools in the extensive range of sustainable investment solutions available to ESG investors as they seek to navigate a increasingly complex world. The importance of continued research and development along these lines as a means to uncovering new strategies and financing approaches to finance the sustainability transition cannot be overstated.
