Applying materiality to ESG ratings can improve the accuracy for forecasting returns. What are the data challenges of quantifying ESG and determining materiality? How vital are governance factors such as ownership structure, shareholder orientation, and institutional presence in predicting return variability? And is there a threat of ESG overcrowding?


Mozaffar Khan, Vice president, Causeway Capital Management

Cheryl Smith, Economist, portfolio manager and research analyst, Trillium

Moderator: Amanda White, Director of institutional content,

Key Takeaways

  • Measuring the strength of a company’s ESG characteristics is becoming an increasingly important part of investors’ assessing of risk and return, with consumers and policymakers increasingly applying pressure for greater sustainability, and a rising body of systemic evidence pointing to a correlation between the ESG characteristics of companies and their forward return performance, says Mozaffar Khan, vice president of Causeway Capital Management
  • But measuring a company’s ESG characteristics and accessing the data required for this is an involved exercise; be careful of over-reliance on off-the-shelf third-party ESG ratings.
  • Khan’s research finds some material factors are typically omitted or underemphasised in governance ratings. For example governance ratings can focus on board of director characteristics while neglecting the strength of investor protections and institutions in a country.
  • After identifying these factors, quantifying them can involve novel solutions and proxies for measuring exposure, particularly with issues like modern slavery which are not directly observable.
  • Cheryl Smith, an economist and portfolio manager and research analyst with Trillium Asset Management, owned by Perpetual, pointed out how widely ratings agencies differ in how they rate companies, and posed the question whether this means ESG data is unreliable in distinguishing between companies? And does getting this right lead to better alpha or does the market already incorporate this information?

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