Integrating ESG into portfolios

Global flows into environmental social and governance (ESG) exchange traded funds (ETFs) have sky-rocketed, amassing US $31.9 billion ($41.2 billion) in the first quarter of this year. The trajectory is unmistakable: ESG investing is reaching a tipping point. Between 2017 and 2019, ESG investing grew by more than a third, to US$30+ trillion, over a quarter of the world’s professionally-managed assets. 

Some estimates say it could reach US$50 trillion over the next two decades. Locally, we know that ESG is a priority for many Australian investors. Research conducted by the Responsible Investment Association of Australasia (RIAA) last year showed 86% of Australians expect their super and investments to be managed responsibly. 

Some think ESG is all about investing for impact. Others think it is about imposing a certain set of values on companies. But we’ve found, ESG is about informing better decision-making by adding the assessment of material, environmental, social and governance issues to the investment process. It enriches traditional research like analysing financial statements, industry trends and company growth strategies. 

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ESG may have started out with moral goals at the forefront, but as society changes, ESG is now viewed as an imperative metric when looking at a company’s future potential.

Addressing material ESG issues is not just good business practice but essential to a company’s long-term financial performance—a matter of value, not just values. 

Recent research highlighting long-term risk-adjusted returns and lower downside has challenged the notion that ESG investing could mean sacrificing returns. State Street

Global Advisors’ research finds that 69% of ESG adopters say pursuing an ESG strategy has helped with managing volatility and 75% expect the same returns from those investments as they do from others.

While the benefits of ESG investing may be clear, the best path for individual investors to take isn’t as obvious. Some may want to dip a toe into ESG investing; others may want to commit a significant part of their portfolio. 

Education in this space is critical to progress and success. Phrases such as ‘impact investing’ and ‘ESG integration’ have become widespread, but what they actually mean is not always clear. This lack of clarity can impede progress. 

Investors need a solid understanding of ESG terminology and their investment rationale to fully appreciate ESG options and benefits. And providing portfolio examples that are relatable and connect back to their motivations brings ESG investing to life.

An investor’s need for advice in navigating these options is an opportunity for advisers to add value and strengthen their relationship with their client. That’s backed up by fact: 64% of Australian investors have said it is important advisers are able to help with ESG investing. So where to begin? 

It is important to remember that the client must come first. Effective integration of ESG principles into a portfolio begins with a client-focused process, not a product-focused process. Using a client-centric approach requires advisers to identify suitable ESG strategies, offer beneficial education, and track clients’ progress toward longer-term objectives. 


What are the client’s investment objectives? Determine if integrating ESG considerations fits the long-term plan.

What are the client’s ESG priorities? Educate as part of the discovery process. Clarify the motivation to inform the journey, narrow the focus and shape priorities.

Where are the market opportunities? Target opportunities to identify resources and select ESG investment strategies.


What are the client’s desired outcome priorities? (Values-based and risk-based aspects of implementation). Select degree of portfolio integration.

How much of a client’s portfolio will be allocated to ESG strategies? Assess the broader asset allocation to keep the investment plan level properly balanced. Avoid introducing sector or style biases.

How inclusive does the client want to be in applying ESG? Review personal values and risk framework with clients to help them understand ESG investing considerations.


What is the client’s time horizon and intended impact? (Identification of tactical opportunities; sleeve of a portfolio or total integration). Understand the client’s perspective and align expectations on non-financial outcomes and reporting.

How does the client define and measure success? (Strategies, optimisation techniques ,and expense considerations). Define success as part of the investment plan evaluation.

Maintain the principle of high-impact investing. ESG does not require sacrificing performance. Modify ongoing reporting to address client’s priorities. Reallocate portfolio as motivations shift.

Some of these objectives span different ESG strategies to varying degrees. And they are not mutually exclusive—multiple ESG strategies can be combined in a single investment vehicle to achieve the investor’s specific goals. Whatever the client’s aim, financial advisers will need to optimise ESG investment opportunities across a range of asset classes and risk spectrum.

ESG enables clients to invest with greater precision—to apply a broader lens to more deeply analyse investments. Whether they want to match investments with their mission or pursue enhancing long-term performance, ESG can help meet their goals. It’s a new way of valuing the future.  

Brie Williams is head of practice management at State Street Global Advisors.

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