Our portfolio construction methods are predicated on our ability to make accurate assessments of whether a company’s practices are aligned with the ethical principles that we use to determine our investable universe. Such determinations are necessarily based on the use of nonfinancial, nonstandardized, and unstructured data which is prone to gaps in coverage, inconsistent calculation methods, and “greenwashing” by company management.
As a result, our techniques, analyses, and assessments may miss material ethical issues, leading the portfolio to temporarily hold securities that are inconsistent with established ethical criteria. We may also inaccurately exclude a security from our investable universe based on these incomplete or inaccurate data, which may lead to overlooking a potentially attractive investment opportunity which would have been permissible under our ethical covenant.
Additionally, the composition of an ESG focused portfolio could differ significantly from its index in terms of sector composition, company weightings, and industry exposure. This could cause the portfolio to underperform portfolios that are not constructed with a similar focus.