Which practice is commonly used to assess ESG criteria in an investment portfolio?

Utilizing ESG ratings and scores is a fundamental practice for evaluating environmental, social, and governance criteria in an investment portfolio. This method involves the assessment of companies based on a set of standardized metrics that reflect their performance in these three key areas. ESG ratings allow investors to compare companies across different industries and identify those that align with sustainable and socially responsible practices.

These ratings typically consider various factors, including a company’s carbon footprint, labor practices, governance structures, and community engagement, among others. By analyzing these ratings, investors can make informed decisions about which companies or funds to include in their portfolios based on their adherence to ESG principles and their potential risks and opportunities.

The other options, while relevant to investment analysis, do not specifically focus on ESG criteria. Absolute return analysis looks at the returns of an investment disregarding market movements, performance benchmarking compares investment performance to a standard or index, and risk-adjusted return analysis evaluates returns relative to the risk taken but does not inherently incorporate social or environmental factors. Thus, ESG ratings and scores stand out as the key method equipping investors to assess and integrate ESG considerations into their investment strategies.