As institutional investors are increasingly looking to incorporate environmental, social and governance (ESG) factors into their investment processes, State Street is expanding its suite of services by partnering with Harvard Business School professor George Serafeim, whose work on the subject of ESG investing has been cited in numerous academic journals.

He will work with researchers at State Street Associates (SSA), the bank’s academic research arm that works to provide investment insights to chief investment officers, portfolio managers and analysts at pension funds, mutual funds, insurance firms, sovereign wealth funds and other institutional investors.

SSA, which was founded in 1999 and is housed in State Street Global Exchange, has partnered with professors from various other institutions to tackle things like investor behavior, inflation, performance measurement, and other market challenges. [See Box.] This is the first time the group will address ESG, says Will Kinlaw, head of State Street Associates.

“As this theme has emerged, we’ve been watching it very closely as a firm,” Kinlaw says. “We felt that this would be an area where we could benefit from a real high-profile academic like George, who has done very rigorous work in this space. With George, what really stuck out was this focus on the link between ESG and performance—the materiality of ESG factors to performance. That’s been the focus of his research and it’s very impactful.”

Through the pairing, SSA will release white papers to provide actionable insights that are drawn from anonymized data collected by State Street Corp. They will also look to create “dashboards and other analytics tools that would be updated in real time and would help clients understand how different ESG factors are evolving or how markets are trading around different ESG factors,” Kinlaw says.

Serafeim was unavailable for comment.

The Expanding ESG Landscape

According to consultancy Opimas, total spending on ESG data, including ESG content and indices, will hit $745 million by 2020, up from $505 million in 2018. This growth is indicative of the increasing demand by institutional investors to better understand materiality between ESG adherence and a company’s financial performance.

While there are numerous academic papers that state that firms with superior performance on material sustainability issues outperform firms with inferior performance on these issues, from a practical, trading perspective, firms are still navigating this sprawling field.

Carmine De Franco, head of fundamental research at Ossiam, an affiliate of Natixis Investment Managers, told WatersTechnology’s sibling publication Risk.net that understanding materiality is not as simple as firms that are strong on ESG will yield strong performance.

“Many people say, maybe too optimistically, that a company that ranks highly on ESG measures brings outperformance. As a responsible citizen, I would like to believe it. But in reality, it’s more complicated,” De Franco said.

And Asha Mehta, lead portfolio manager and director of responsible investing at Acadian Asset Management, noted that the industry—and Acadian, itself—is still working toward developing a common framework to better understand ESG materiality. “It’s problematic not to have [a common framework] because when we talk risk we’re talking about different things. And when allocators are evaluating managers, there’s no consistency,” he said.

Timothy Smith, director of ESG shareowner engagement at Walden Asset Management, tells WatersTechnology that ESG investors—as well as the subset known as socially responsible investors (SRIs)—need all the standard financial information a conventional investor would need to make stock selections. But they also need to gather this divergent sea of ESG data from numerous sources. Some of it is received via basic public information and other datasets are specialized reports and indices from data giants like MSCI, Refinitiv and Bloomberg, and specialists such as Trucost, Sustainalytics, RepRisk, Four Twenty Seven, and CDP. They also have to dig up specific sources of information such as political spending, and at times they have to file a Freedom of Information Act request.

“So while there is an explosion in SRI investing, there is growth in the various information sources as well,” Smith says, which makes finding materiality even trickier.

• READ MORE: The ESG space is growing rapidly and gaining more attention, but one area that has been largely ignored by data providers is that of ESG information specific to fixed-income investors. Click here to read more.

To that point, SSA’s Kinslaw says incorporating ESG factors into the investment management process is complicated because measuring the various ESG factors can be challenging: Not all datasets agree, and there isn’t a consensus on how and what should be measured, as Mehta noted. Even when a portfolio manager finds a measurement they believe in, how they incorporate that into an investment process raises additional questions as to how it should be incorporated into the wider portfolio.

“There’s a ton of research that needs to be done in this space,” Kinlaw says. “The relationship between ESG factors and performance is complicated because it varies a lot depending on the type of company, the sector, the [time] horizon, and return impacts versus risk impacts—some indicators are more about if there’s poor governance that might result in better returns for some period of time, but your exposure to tail risk [increases] and your long-term prospects are dimmer. It’s not straightforward and it’s an area that’s ripe for fact-based, data-driven research and analysis.”