The potential benefits of integrating ESG into your OCIO solution

We believe outsourced investors can incorporate ESG factors into their investment solution without sacrificing potential returns. And we also believe that it’s more crucial than ever before. Here’s why.

For organizations who have outsourced the management of their investment program, pursuing environmental, social and governance (ESG) factors in their investment program can be a challenge. As ESG continues to grow in prominence, it’s important to efficiently and proactively manage these exposures in order to express your ESG beliefs and ensure adequate return. This is especially true in today’s market environment, where investors are routinely challenged by high market volatility and global as well as domestic political uncertainty.

For investors who have outsourced the management of their investment program, it’s important to understand how ESG factors are incorporated into your provider’s offering. After all, fiduciary decisions need to be made at every stage of the investment process, from putting investments in place to monitoring and managing the portfolio on an ongoing basis.

It’s also important to recognize where the opportunities or risks may lie when considering ESG factors. The intersection of ESG and OCIO can provide organizations with a richness of information and specialized strategies to identify issues driven by risk mitigation, as well as potential return maximization.

A refined and integrated approach to ESG

One of the benefits of OCIO is using the expertise of a chosen provider and making the most of the provider’s investment proficiency. This includes understanding their processes—such as how they are capturing and utilizing ESG factors.

While ESG factors do impact security prices, we believe they don’t have to mean sacrificing performance. In fact, building an investment portfolio that has a greater focus on ESG considerations has the potential to lead to superior risk-adjusted returns. Why? There continues to be a growing acceptance today of the correlation between ESG factors and an organization’s economic value.

OCIO clients can therefore benefit from a holistic approach to ESG integration across their business and culture, rather than it being a separate consideration or afterthought. We believe the following are the best practices and considerations that organizations can potentially benefit from when OCIO and ESG are integrated:

• Manager evaluations
  Both a sound awareness of ESG factors and a robust process are essential for responsible investing. A robust process can deliver strong investment returns and can help meet objectives over the long term, as can establishing a dedicated ESG rank for managers’ investment strategies. These ESG ranks are a qualitative assessment of how well active managers understand the impact of ESG factors on short- and long-term security price evolution, portfolio-level risk and the return profile of the portfolio. This evaluation considers the asset class, region and industry, and how their approach to ESG is evolving over time.
  
  
• Customized ESG strategies
  In addition to incorporating ESG considerations in all funds, an OCIO provider can build customized ESG strategies for investors with sufficient assets. These strategies can create innovative, proprietary methodologies and tools to support advanced ESG investors in pushing boundaries, allowing continual delivery on fiduciary responsibilities.
  
  
• Active ownership and engagement
  Ensuring your OCIO provider has a robust proxy voting and shareholder engagement policy and strategy helps ensure that ESG factors are taking into consideration by the firms incorporated into your investment solution. This approach should strive for transparency, accountability, independence, and the creation of long-term value for shareholders.
  
  
• Industry collaboration
  Part of adding value through incorporating ESG factors into your OCIO solution, is ensuring that the firm is able to effectively assess risk. Organizations like the UNPRI, CDP Climate Change, and the Institutional Investors Group on Climate change are all focused on driving the incorporation of ESG factors across the industry. Ensuring that your OCIO is aligned with and participating in groups such as these is key to keeping the climate risks that can have the most impact on your investment portfolio top of mind.

The bottom line

ESG investing is a rapidly evolving field, and there are many different ways to incorporate ESG factors into your investment process. If you’re seeking opportunities that align with both your ESG goals and your financial objectives, it’s essential to ensure that you have a sound process in place. With the focus on ESG only likely to increase in the coming years, we believe that choosing an OCIO partner who fully embeds ESG within its investment process is a positive step to prepare for an ever-changing world.

Learn more about Russell Investments’ approach to investment outsourcing, and check out our annual ESG survey of active managers for insights on the integration of ESG considerations in investment processes.