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The devil is in the details: does responsible investing really deliver?

By Michael J. LaBella, CFA, Lily Sullivan, Josh Russell, PhD and Dmitry Novikov, PhD at QS Investors, a Legg Mason affiliate.

An estimated US$30 trillion of assets under management today take into account some form of Environmental, Social or Governance ('ESG') data.

However, the question is whether responsible investing delivers only perceived value or can it really enhance overall risk/return remains. Much of the challenge in answering this question arises from a lack of standardisation in terms of the definition of ESG and the approach to measuring it.

In this paper we discuss the divergence in ESG ratings across different agencies as well as methods investors can use to solve for the unintended exposures this may lead to. Our analysis supports the hypothesis that by considering the key ESG factors relevant to each industry, you can potentially improve overall portfolio results by reducing risk.

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