ESG Attribution Implementation

ESG Attribution Implementation

We regularly incorporate ESG and analysts’ ratings into attribution and have seen how these can benefit asset managers and their clients.

We have created a flexible, daily attribution system that can be used to attribute against different classification variables, such as ESG factors, analyst ratings, and strategy tags, to analyse portfolio performance and risk.

Using multiple external and internal sources of ESG factors and analyst ratings can help portfolio managers understand the drivers of performance and the factors and tilts within their portfolios. This allows them to refine their portfolio construction process. Combining these data sets with attribution and ex-post risk can provide better management oversight, client reporting, and risk budgeting.

Some of the data sets, such as ESG and analyst ratings, may not be good explainers of performance in the short term, but they can be used as secondary inputs to the primary classification structure that reflects the portfolio manager’s style.

Thinking about the data

Success in asset management is often about which team can most profitably interpret and leverage the available data. Increasingly we are being asked to combine data sets, to show them together with portfolios and performance and attribution results and to provide comparisons across portfolios. This feeds directly to client reporting, to management, but also, crucially, back to portfolio managers who can use this information to inform and refine their portfolio construction process.

Traditional attribution has focused on countries, sectors and ratings. It happens once a month when Excel reports are delivered to desks and is aimed primarily at report writing and client reporting. We’ve sought instead to create daily, at the desk attribution which is flexible enough to be able to quickly switch between different classification variables. This means that as well as the traditional factors, PMs can now see their portfolios broken down by one or more source of ESG factors and track these through time. It becomes easier to understand what drives factors and when particular tilts are likely to outperform. Moreover, this doesn’t just have to include the well known external providers, it can also include internally created and sourced ESG scores.laptop screen displaying an ESG analyst report

There tends to be a lot of standing data available that doesn’t get combined with attribution but could add value to the portfolio construction when applied:

  • ESG: different factors have more or less efficacy for particular sectors. We have created reports that show multiple factor exposures in the portfolio at the same time – replicating the attribution multiple times using different factor breakdowns. And also, combined ESG scores with broad sectors to create meaningful insights.
  • Analyst Ratings: Equity and fixed income analysts will often provide outlooks and an alpha. Reports combine attribution into alpha quintiles and outlook categories.
  • Strategy Tags: Capture real performance, from the implementation transaction through to exit, automating futures rolls and cash flow management allows PMs to report performance exactly as they manage their portfolios.

Combining ESG with attribution

In the short term, many of these factors – be they the MSCI Carbon Emissions Scope, a Moody’s rating or an Analyst’s alpha – may not be good explainers of performance. But understanding how portfolios look and behave broken down into these categories can be an important aspect of management oversight, of the portfolio process, of client reporting and of risk budgeting. First, are the portfolios aligned with the stated process and, second, is that process adding value in the ways expected?

Many PMs will use sectors, countries, asset classes or regions as their primary portfolio construction breakdowns since risks and outcomes align best along these factors. However, the PM will usually want to see the attribution results using other categories because that may be a stated approach of the fund or to understand in greater detail what is driving performance.

ESG rating can be standalone secondary groupings or be combined into the primary grouping, classified according to the sector breakdown. It’s then clear to the outside user of the reports exactly how the portfolio is structured and what value this added.

A performance Manager using cloud-based investment management software to maximise ROI.

What and how do we do ESG Attribution Reporting?

We have two approaches to reporting. Our UI can show both primary and secondary classification structures so can quickly switch between a sector and an ESG breakdown. We also have a detailed classification builder which can incorporate any classification data that may be available – standard accounting measures, externally provided ESG ratings or internally created analysts’ ratings. Reports can go one better. We can show many portfolios split by multiple ESG rating types to instantly show attribution and compliance.James Taylor and Anton Karadakov discussing Cloud Attribution strategies

Get in touch to learn more about our custom-built ESG solutions

Being available daily and on the desktop allows users to become more familiar with the data and its performance. Their confidence in tilting the portfolio towards particular ESG factors is strengthened. Our users tell us that creating and using attribution in this way has added value for their clients. Get in touch to find out how we can help you do the same.