MIT_Building_E62_(MIT_Sloan)_-_MIT,_Cambridge,_MA

MIT Sloan improves ESG in financial sector

CAMBRIDGE, MA: Capital markets and regulators are moving fast to integrate Environmental, Social, and Governance (ESG) factors into the investment decision-making process, but struggle with the quality and consistency of ESG data, despite the framework laid out by the Global Reporting Initiative. The MIT Sloan Sustainability Initiative‘s Aggregate Confusion Project (ACP) welcomes four new investment firms that will help tackle the ESG measurement challenge, and develop methodologies for more rigorous and reliable ESG integration.

To recruit these new founding members, ACP reached out to firms across geographies, and who play different roles in the investment industry. They are MFS Investment Management, AQR Capital Management, Qontigo, and Asset Management One.

These firms join Massachusetts Pension Reserves Investment Management (Mass PRIM) Board, the first organization to join the MIT consortium in July 2020. Over the next three years, members of the consortium will work with MIT researchers to improve ESG measurement and implement new techniques.

“Our five founding members of the ACP will serve as valuable thought partners with our research team,” says Roberto Rigobon, the Society of Sloan Fellows Professor of Management and Professor of Applied Economics at the MIT Sloan School of Management. “By providing financial support for the project and sharing their experiences with ESG integration, they will be integral to developing a more robust approach to sustainable investing. The challenges they’re addressing in using ESG data will help guide our research and the implementation of new ESG measurement techniques we develop together.”

MIT SLOAN SUSTAINABILITY INITIATIVE: The Aggregate Confusion Project is working to solve this problem through a program of research to improve the quality of ESG measurement and decision making in the financial sector.

To summarize the article, the project will focus on 4 major challenges that investors face (PwC ESG survey), with ESG integration. The first challenge is reducing noise in ESG measurement, which refers to the amount of variation in individual components measured by indices. Researchers aim to lessen this by developing a system for measuring labor treatment, carbon emissions, and product safety as well as aggregating those separate indices into one.

The next challenge is disentangling the effect of ESG-driven investment flows on stock price and firm behavior, which refers to how ESG factors influence returns that might not be exhibited by an index. Researchers hope to address this issue via methods that separate the direct effects of ESG factors from market responses.

The third challenge examines smarter ways to aggregate ESG factors into a composite index. Researchers hope to develop an approach that will combine the varying weights of ESG indices from SRI managers by using Machine Learning Algorithms.

The final challenge is ensuring investors’ preferences are represented in ESG indices as well as the extent to which those portfolios align with investor values. Researchers aim to address this challenge by using a framework called the Choice Equilibrium.

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MIT Sloan's Aggregate Confusion Project, an initiative to improve ESG measurement in the financial sector, welcomes four new investment firms as founding members

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