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Here’s How You Build an ESG Offering

May 25, 2017

Investor interest in and attention to Environmental, Social and Governance (ESG) strategies are increasing dramatically. This is the result of several factors including the rising level of global interest in the environmental and social impact of businesses’ practices and the importance of corporate governance. The tools and technology now available to identify, evaluate and monitor company performance relative to ESG demonstrate that ESG investing can generate competitive (or even above-average) returns.

While millennials and women have been credited with driving this trend, this expanded opportunity set will attract other investors. ESG has gone mainstream.

By formalizing the due diligence process for ESG factors, ESG analysis considers and evaluates the long-term impact that company practices have on the environment and society and how the business governs itself. These evaluations are in addition to the usual evaluation of the company’s financial performance and expectations.

The opportunity is real. The challenge today is for enlightened investors to know where to start.

While MSCI and STOXX have both created an ESG index, much work remains to be done by the members of the advisor community to make a truly diversified ESG portfolio available to investors. Our objective was to build a diversified, multi-manager, global ESG portfolio, including both mutual funds and ETFs, that aligns an investor's values and social aspirations without sacrificing performance.

We began by using data from Morningstar and other third party data providers to identify approximately 180 ESG-eligible funds. We expect this initial screen to return an increasing number of funds with each passing month, as more funds are introduced and as more managers apply the principles and the ESG name to existing funds.

This expanding ESG universe will require constant oversight to confirm that new products are being considered for portfolio inclusion. For example, many funds, previously available only through pensions and sub-accounts of annuities, are spinning off new funds created by seasoned managers, in an effort to make them available to the general public.

We then do in-depth ESG research using the Morningstar Sustainability Rating. We include all funds that have a Five Globe rating of at least four globes. This ensures that we are looking at the funds that have higher ESG rankings relative to the overall peer group. Amazingly, there are only about 100 funds that meet this screening process.

Using our existing due diligence process, we then apply quantitative screens to the remaining options, adding financially-focused and more traditional investment analysis methods. We found approximately 25 ESG funds that also met our traditional investment metrics.

Finally, we held a variety of calls and meetings with the 25 fund managers to finalize our due diligence process. This left us with approximately 15 funds from which to construct our portfolio.

The ESG Solution is ultimately a strategy that aligns social values with financial goals. It is a globally diversified portfolio with exposure to a diversity of styles, market caps and sectors, including bonds, emerging markets and small cap.


This was the response from a client who has spent more than a decade involved in private, impact investing to express his social values. However, due to the risk inherent in illiquid impact investing, he was only comfortable allocating 10 percent of his total assets to this asset class to support his social goals. Now, by integrating The ESG Solution, he can align 100% of his investment portfolio with his social and financial goals.