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For instance, if you look on the far right hand side, you can see an extreme level of volatility, particularly in the MSCI World SRI index, which is the most concentrated version, that has Tracking Error of about two per cent, for instance. And what you saw, for instance, in February of this year was two percent of underperformance in a single month. And so that actually gives you some window into how these indexes are being constructed and what you need to be cognizant of to control risk in a better way. And when I say it helps provide a window into how these indexes are constructed, it's because in February, that was obviously the big rotation in the market. You went from this market that was favoring more information technology companies to more cyclical companies. And you saw that hurt the MSCI indexes. And so what that tells you is that these big sector bets embedded in those ESG indexes joined five to 10 percent, in fact. And you see these big active bets come through in other ways. I was actually just looking at the largest individual stock bets for the MSCI SRI index. And it's Microsoft. Now, in the world index, It's got a three percent benchmark weight. In the MSCI ESG index, it's 12 percent. So there's these very big active bets taken within these strategies. What do you also see come through in those ESG indexes that contribute to that heightened volatility is they're not controlling other types of underlying factor exposures effectively. For instance, size. This is very problematic when you think of different ESG indexes and more different ESG portfolios that these portfolios, as the index is constructed in a more naïve way, tend to get pulled towards larger cap stocks, for instance. Larger cap stocks disclose more ESG data. They tend to look a little bit better on ESG, and you tend to see this large cap tilt.

When you see changes in market dynamics, if you've got that size tilt, that can be impactful to performance. It can be in a negative way. But also what you see come through in these ESG indexes in terms of how they're constructed, is that they're not properly controlling the underlying ESG exposures. You could have very unbalanced ESG exposures. What I mean here is that you could be tilting towards all companies that look much more favorable in E rather than S, and that can create volatility because that imbalance. So what we do when we start to think about how you can control risk in a more sensible way to give a more index like return profile, for instance, is to limit the size of those active bets you take around sectors and countries. So we take very minimal active bets around sectors and countries in the strategies that we advocate in the ESG space. So it's much more intra-sector selection, we're favoring the better ESG companies in the -- in a particular sector. Now, I know you may hear that and say, well, how much can you actually move the needle with ESG if you're taking that approach that you're not outright excluding or tilting ways to give away from certain industries. Well, we can move the needle still a significant amount.

What you say in terms of some of the attributes of the portfolios that we can compute, is that we hold about a quarter of the benchmark and that we can still significantly improve and increase some of the underlying ESG attributes. So that's -- that approach of not taking big sector bets, country bets is important if you want to balance risk with your pursuit with ESG. That's also being sensitive to those underlying factor exposures. Control those tilts towards those large cap stocks. That's not going to be helpful in the long run. It could actually pull you towards those ESG traps that I spoke of before and also be cognizant of the underlying exposures to ESG. Try and ensure that you're balancing the exposure between ESG to, again, help smooth out performance. And now if you do that, if you put all this together, those insights that are speaking of around reducing that performance drag the steps to reduce volatility of the portfolio. Well, you can see the outcomes here on this slide. So this is similar to the slide that Patrick was showing you earlier when it was just the MSCI indexes. But what we've now done is added on a fourth portfolio or a fourth strategy here, which is a simulated strategy that we've developed here at QMA, where what we've done is we've taken the approach of trying to build a ESG index alternative, where we're trying to tilt towards or improve the ESG profile of this index by about 20 percent, relative to the parent index, a meaningful improvement. But we're taking into account all those other elements that I spoke of as well - being very risk aware. Don't take the take sector bets, don't take the country bets, for instance, control underlying factor exposures, incorporate other fundamental considerations into how you build the portfolio and you see the benefit play out here on the left hand side. When we look at tracking error, for instance, that lighter blue bar, that's the tracking error of the strategy that we've developed. It's in line with the lowest tracking error from one of the MSCI indexes. So -- of about 70 to 80 basis points. But why is that so striking? Look at the figure on the right hand side then, where you can see the number of holdings in this strategy. You can see here that we're holding around 460 positions, about a quarter of the index. Now, contrast that with the MSCI World ESG universal strategy that you can see listed there as well. That's the strategy from MSCI that's got a comparable tracking error to us, withholding almost the entire benchmark, to achieve a similar level of tracking error.

So approaching risk management in a which more similar and a much more sensible way, you can achieve lower tracking error and much more index like return profile, but still have a meaningful improvement in ESG, as you can see by that by reduced number of holdings. Now, what does this all mean for performance as well? We're just looking at risk. If we can just go back one slide, please. Patrick, you see how all this plays out from a pure performance perspective as well. Again, it's a similar chart to what you saw earlier from Patrick, where it was those three MSCI indexes. But we've now overlaid the performance of our ESG index alternative on here. That's that lighter blue line, very different performance experience. And we'd argue that performance experience is probably more palatable to an investor who's moved from a traditional index to something where they're wanting to get those index-like returns with an improved ESG profile, probably something that's much more palatable.