{"id":44300,"date":"2021-05-03T14:39:00","date_gmt":"2021-05-03T14:39:00","guid":{"rendered":"https:\/\/wp2.inovestor.com\/2021\/05\/how-to-add-esg-factors-to-your-portfolio-positive-best-in-class-screening\/"},"modified":"2021-05-03T14:39:00","modified_gmt":"2021-05-03T14:39:00","slug":"how-to-add-esg-factors-to-your-portfolio-positive-best-in-class-screening","status":"publish","type":"post","link":"https:\/\/www.inovestor.com\/en-us\/2021\/05\/how-to-add-esg-factors-to-your-portfolio-positive-best-in-class-screening\/","title":{"rendered":"How to add ESG factors to your portfolio? Positive\/ Best-in-class screening"},"content":{"rendered":"

[vc_row type=”in_container” full_screen_row_position=”middle” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/4″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][\/vc_column][vc_column centered_text=”true” column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/2″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][nectar_btn size=”small” button_style=”regular” button_color_2=”Accent-Color” icon_family=”none” url=”https:\/\/account.inovestor.com\/InoAdvisor\/en-CA\/Stock\/Esg?symbol=XTSE%3APPL” text=”TRY ESG ANALYTICS NOW”][\/vc_column][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/4″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][\/vc_column][\/vc_row][vc_row type=”in_container” full_screen_row_position=”middle” scene_position=”center” text_color=”dark” text_align=”left” overlay_strength=”0.3″][vc_column column_padding=”no-extra-padding” column_padding_position=”all” background_color_opacity=”1″ background_hover_color_opacity=”1″ column_shadow=”none” width=”1\/1″ tablet_text_alignment=”default” phone_text_alignment=”default” column_border_width=”none” column_border_style=”solid”][vc_column_text]The best-in-class approach involves selecting\u00a0<\/span>top\u00a0<\/span>companies\u00a0<\/span>in terms of ESG\u00a0<\/span>metrics<\/span>.<\/span>\u00a0These companies are actively\u00a0<\/span>making an effort<\/span>\u00a0to improve their ESG impact. Best-in-class screening rewards the<\/span>m<\/span>\u00a0by ov<\/span>erweighting the<\/span>se companies<\/span>\u00a0in<\/span>\u00a0their<\/span>\u00a0portfolio<\/span>s<\/span>.<\/span>\u00a0<\/span><\/p>\n

This method has the advantage of including companies that operate in industries that are not necessarily ESG-friendly. To illustrate, the energy sector is one of the worst\u00a0<\/span>sector<\/span>s<\/span> for sustainable investment due to its devastating effects on the environment. <\/span>T<\/span>he energy sector represents\u00a0<\/span>10.2%<\/span><\/a>\u00a0of the total nominal gross domestic product in Canada<\/span>\u00a0<\/span>and\u00a0<\/span>represents\u00a0<\/span>over<\/span>\u00a01<\/span>2<\/span>% of the\u00a0<\/span>S&P\/TSX Composite Index<\/span>\u00a0as of March 31, 2021<\/span>. Excluding this sector\u00a0<\/span>would mean a substantial deviation from the ma<\/span>in<\/span>\u00a0Canadian market index.<\/span>\u00a0Positive screening also has the benefit of en<\/span>couraging companies to adopt better ESG guidelines because that would\u00a0<\/span>make them more competitive compared to their peers.<\/span>\u00a0<\/span><\/p>\n

However,\u00a0<\/span>implementing a best-in-class screen is<\/span>\u00a0time-consuming<\/span>,<\/span> if done without the use of third party ESG ratings. Analysts <\/span>must<\/span>\u00a0examine\u00a0<\/span>each\u00a0<\/span>company<\/span>\u00a0in the universe and rank them in terms of sustainability.<\/span>\u00a0<\/span>Third party such as\u00a0<\/span>Sustainalytics<\/span>, offered by\u00a0<\/span>InoAdvisor<\/span>\u00a0as an add-on, can\u00a0<\/span>considerably<\/span>\u00a0improve this\u00a0<\/span>tedious\u00a0<\/span>process.<\/span>\u00a0We provide a breakdown of the ESG Risk Rating,\u00a0<\/span>Notable Material ESG Issues, Product Involvement and a list of Controversies<\/span>\u00a0on over 12,000 companies worldwide<\/span>.<\/span>\u00a0<\/span><\/p>\n

\"\"<\/span><\/i><\/p>\n

Implementation<\/span><\/i>\u00a0<\/span><\/p>\n

Best-in-class selection can be done on an absolute basis, whe<\/span>n<\/span>\u00a0companies\u00a0<\/span>are\u00a0<\/span>selected based on the<\/span>ir<\/span>\u00a0outperformance in terms of ESG<\/span>\u00a0characteristics<\/span>\u00a0in the entire universe, or on a relative basis, whe<\/span>n<\/span>\u00a0companies are compared to their\u00a0<\/span>competitors<\/span>\u00a0<\/span>within the same industry\/sector\u00a0<\/span>and are selected based on their superior ESG ratings.<\/span>\u00a0<\/span><\/p>\n

We focus on the relative basis\u00a0<\/span>as<\/span>\u00a0it is the\u00a0<\/span>most used<\/span>\u00a0method. The steps are as follows:<\/span>\u00a0<\/span><\/p>\n

1. Assign an ESG rating to each company in the investible universe<\/p>\n

<\/span><\/p>\n

Each company <\/span>has to<\/span>\u00a0be analyzed and assigned an ESG score\u00a0<\/span>in order t<\/span>o<\/span>\u00a0compare companies across sectors\u00a0<\/span>or<\/span>\u00a0industries and determine which ones are the best in terms of ESG performance.\u00a0<\/span>An alternative to this lengthy process is<\/span>\u00a0to\u00a0<\/span>use<\/span> readily available ESG data providers.<\/span><\/span><\/span><\/span><\/p>\n

2. Rank the stocks from best to worst in each sector<\/span><\/p>\n

<\/p>\n

Classify the companies in each sector or indus<\/span>try from best ESG scored companies to worst ESG scored companies.<\/p>\n

<\/span><\/span><\/span><\/p>\n

3. Overweight the ESG leaders and underweight the ESG losers in your portfolio<\/span><\/p>\n

<\/p>\n

Depending on your strategy, you can overweight top ESG companies and underweight bottom ESG companies or only include top ESG companies in your po<\/span>rtfolio<\/span><\/p>\n

Illustration<\/span><\/i>\u00a0<\/span><\/p>\n

Using the\u00a0<\/span>InoAdvisor\u2019s<\/span>\u00a0screener, we find the best-in-class stocks in the Canadian energy sector<\/span>.<\/span>\u00a0<\/span><\/p>\n

We apply the following filters to stocks listed on the TSX:<\/span>\u00a0<\/span><\/p>\n