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Traditional performance attribution shows which active exposures added value to a portfolio and which detracted value. But for ESG mandates, it can lead to a misleading interpretation because it doesn’t explain why certain exposures exist.
The simplest example is when a client wants to exclude an entire category of companies, such as fossil-fuel producers, human rights violators, or the prison-industrial complex. If the category outperforms, the portfolio’s active underweight appears to be a poor allocation decision.
What traditional performance attribution fails to capture is that the manager never had the investment discretion to allocate to that space under the ESG guidelines in the first place.
What Attribution Does (and Doesn’t) Measure
For more than four decades, the Brinson-style framework has been widely used for equity performance attribution. It explains a portfolio’s active return relative to a benchmark through three key equity-specific components:
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Allocation: Shows whether overweighting or underweighting sectors, industries, or asset classes relative to a benchmark helped or hurt
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Security Selection: Measures whether the securities held in those categories performed better or worse than the sector average of the benchmark
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Interaction Effect: The combined impact of different weights and holdings within the same sector, often reported together with security selection
Modern fixed income attribution models, though newer than the Brinson framework, are far more complex. They break down excess return into specific risk factors, including interest rate management (duration), yield curve positioning (convexity), sector/credit allocation, and spread analysis.
Both frameworks do what they were built to do. They identify the sources of relative performance, including sector positioning, security selection, and fixed income exposures. For that, they’re valuable.
But neither framework is built to interpret qualitative ESG screens because neither can isolate the value added by sustainability choices. They were designed to measure the consequences of an active exposure, not explain its origin. They don’t distinguish between an underweight resulting from a manager’s negative outlook, a client-directed restriction, or a strategy’s stated investment policy.
The frameworks see an active weight and report the associated return. That measurement answers how the portfolio performed relative to the broad opportunity set. It doesn’t answer how well the manager invested within the opportunity set the client approved.
How the Energy Sector Made the Attribution Gap Real
The gap became pronounced in 2021 and 2022, when the S&P 500 Energy sector returned 54.6% and 65.7%, respectively. It was the strongest-performing sector in the index for both years.1
For a portfolio that excluded fossil-fuel producers, attribution would show that its energy underweight detracted from returns relative to the S&P 500. But it doesn’t show whether the underweight was a discretionary forecast on oil prices or the result of a standing mandate restriction. Those are very different facts, even if they produce the same relative-return result.
A manager who avoided energy because they expected poor returns should be evaluated differently from a manager who implemented a client’s instruction not to own fossil-fuel producers. Unfortunately, existing attribution models record active exposure the same way in both cases.
The Perfect ESG Attribution Solution Doesn’t Exist
Research on ESG performance evaluation has increasingly recognized this problem. A 2022 brief from the CFA Institute Research Foundation highlights the lack of precise tools to measure the non-financial success of ESG mandates.2
Practitioner and academic work have since proposed ways to incorporate exclusions, carbon intensity, ESG scores, and other sustainability measures into attribution. A 2023 paper from Achmea Investment Management3 discusses a model that uses Shapley values to explain the impact non-financial metrics have on portfolios. In 2024, VBA Journaal published an expansion of the Brinson-Fachler framework and the Investment Decision Process model that includes ESG considerations.4 But no single approach has become a market-wide reporting standard.
Some reporting systems allow advisors to hardcode sector exclusions or upload customized, prescreened benchmarks. Those tools can improve the comparison, but they don’t automatically identify the source of the active weight or cleanly separate a mandate restriction from the manager’s discretionary decisions.
What is still lacking is a standard way to explain the underlying reason for those return differences.
For advisors, that means the solution is less about waiting for a perfect attribution model and more about making the existing report easier to interpret.
How To Use the Current Attribution Framework in Values-Based Portfolios
There are three ways advisors can use existing attribution reporting to support values-based mandates:
1. Use Two Reference Points
Some systems can run attribution against a screened benchmark alongside the market index. The broad view shows the consequence of the screen. The screened view helps show what the manager added or subtracted after the screen was in place. It’s not exact, and interactions can complicate the results. But it’s more informative than a report that conflates constraint with decision.
2. Document the Source of the Exclusion
At onboarding, record whether each exclusion came from the client, the strategy mandate, the advisor’s investment policy, or the manager’s own active process. The client shouldn’t have to reconstruct that distinction from memory after an unfavorable year.
3. Discuss the Constraint Before Discussing the Shortfall
If an exclusion has a material effect, explain it before the client finds a negative allocation effect in a report. Explaining an exclusion proactively provides context. Context delivered after a question is raised sounds like an excuse.
ESG screens can help or hurt relative returns, sometimes materially, depending on the market cycle. The same fossil-fuel exclusion that detracted in 2021 and 2022 added to relative returns in 2020, when energy was the weakest sector in the index.1
Either way, discussing the results means separating three things: how the mandate set the restriction, how the market determined the short-term return consequence, and how the manager performed on the decisions they had the discretion to make.
When the Report Can’t Tell the Story, You Need To
An exclusion’s return effect is not, by itself, a verdict on investment skill. It’s the financial consequence of a portfolio differing from its benchmark, and the report can’t show whether that difference reflected a conviction, a constraint, or both.
Until reporting practices make that distinction more consistently, advisors will need to make it clear themselves.
Sources and Notes
- S&P 500 Energy Sector (Calendar-Year Total Returns) 2020, 2021, and 2022, calculated from S&P Energy (TR) Index values published by the S&P Dow Jones Indices, a Division of S&P Global, https://www.spglobal.com.
- Stephen M. Horan, CFA, CIPM, Elroy Dimson, FSIP, Clive Emery, Kenneth Blay, Glen Yelton, and Ankit Agarwal, CFA, “ESG Investment Outcomes, Performance Evaluation, and Attribution” (CFA Institute Research Foundation, October 2022).
- René Wijnen, Ralph Sandelowsky, and Dennis Thé, “Measuring the Performance Impact of ESG Investing”(Achmea Investment Management, September 2023).
- Robbert Lammers, Sam Radford, and Vincent Verkerk, “,” VBA Journaal, no. 159 (Winter 2024).
Read more by Lisa Marie Harast:
Lisa Marie Harast, CIPM is the founder of The Write Investment, a strategic content consultancy specializing in sustainable finance communications. With over 20 years in investment communications and a CIPM from the CFA Institute, she helps sustainable finance firms close the credibility gap between rigorous methodology and clear, defensible communication.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
