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Factor Investing and ESG Integration

categories: Indexes, ESG Products & Services, Portfolio Management Analytics, Americas, EMEAI, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Responsible Investing, Asia Pacific, Asset Owners, Hedge Funds, Equities, Research Paper, MELAS Dimitris, NAGY Zoltan, KULKARNI Padmakar, Asset Managers (Quant or Fundamental), general

Integrating ESG criteria into equity portfolios raises important portfolio construction questions. For example, what is the impact of ESG on portfolio performance and characteristics? How does it alter the risk profile and the factor exposures of portfolios? How does it affect institutional investors’ ability to pursue their investment strategy?  Our results show that integrating ESG criteria into passive strategies generally improved risk-adjusted performance over the period 2007 to 2016 and tilted the portfolio towards higher quality and lower volatility securities. We then analyzed the effects of ESG integration on passive investing, factor investing (“smart beta”) and active portfolio management.

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