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Why adjacent data sets are critical to ESG portfolios

Maintaining an effective ESG investment portfolio is not just about tracking ESG performance data. The fact is, ESG data in and of itself won’t provide a complete view of a company’s overall sustainability and resilience.

That’s why adjacent data sets for ESG data are so critical in gaining a clearer picture of investment viability. In the coming weeks, I’ll be talking about the importance of sanctions, PEP and legal hierarchy data sets. Today, I’ll focus on credit rating data.

While ESG metrics provide insights into a company’s ethical and sustainability practices, credit rating metrics provide valuable information about its overall financial health. Examining both data sets enable investors to gain a more holistic understanding of a company’s risk profile and its ability to deal with various economic, social, and environmental challenges.

For example, if a company has strong ESG performance but a low credit rating, it may be facing financial challenges because of potential regulatory fines, lawsuits, or operational disruptions related to sustainability issues.

On the other hand, if a company has a high credit rating but poor ESG performance, it could be exposed to reputational risks, regulatory scrutiny, or operational inefficiencies that could impact its long-term financial viability.

If you want to compose or tune an effective portfolio, you need the ability examine the current projected trends of relevant ESG metrics and classic credit ratings to determine whether it’s going in the right direction.

The key is to find a solution that enables you to identify companies that not only demonstrate strong financial fundamentals using classic credit rating sources such as S&P, Moody’s, Fitch and Morningstar DBRS (augmented by regional credit ratings when needed), but also exhibit a commitment to sustainable practices and responsible governance.

The ultimate goal is to develop your own composite ratings that will inform how you can improve the performance of a portfolio over time. You should be able to monitor the portfolio for its ESG developments, focusing on those that are trending in the right direction, while at the same looking very closely at those that are starting to move in the wrong direction. For those low-performing companies, you can then look for higher-performing alternatives, move funds to them, and possibly phase out the low-performing investment entirely.

Comparing ESG performance and credit rating data is a potent way to maintain resilient ESG portfolios, enabling you to align with an investor’s values, mitigate risks, and drive positive change. But it’s just one element in a holistic ESG portfolio management approach.

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