Qontigo blog post: SDG exposure does not come without some added risk

In a recent blog post by Melissa Brown, Qontigo discussed key considerations for managers incorporating Sustainable Development Goals (SDGs) into their portfolios. They showed that taking on more active risk led to higher potential SDG exposure and that one could achieve meaningful exposure even at a relatively low level of active risk—though the level of exposure varied by SDG.

Of course, making one set of tilts in a portfolio may lead to other exposures, some desirable and some less so. As a follow up to our original analysis, Qontigo looked at what some of those bets might be. 

Qontigo used the end-of-year 2021 data from the Sustainable Development Investments Asset Owner Platform (SDI AOP) to run simple optimizations with the objective of maximizing exposure (defined by the percent of revenue) to all SDGs, with the STOXX^® Global 1800 Index as the investment universe and benchmark. The only constraints Qontigo  employed were to be fully invested with a 3% target tracking error. While they created four different sample portfolios for the whitepaper, they summarize their findings on one of these portfolios, one that maximizes exposure to all SDGs, in a blog post. 

Conclusion of the analyses
Many investors want to incorporate Sustainable Development Goals in their portfolios. This objective is eminently achievable, and the added risk exposures may well be worth the higher SDG exposure. Companies that derive a significant portion of their revenues from a given SDG are often concentrated in a few industries, which will be reflected in a portfolio seeking to maximize exposure to the SDG. Some of those industries may also be more prevalent in certain countries, leading to significant active country exposures. Those companies with the most SDG revenue may also be smaller than average, resulting in a small-cap bias for these portfolios.

Still, it is quite possible to create a portfolio that significantly improves the exposure to SDGs without taking on too much active risk. For some SDGs, companies that rank better also seem to have lower risk, which, all things being equal, should improve the risk-return ratio

You can find the blog post here and can download the full whitepaper here