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Research Insight - Can ESG Add Alpha?

categories: Indexes, ESG Products & Services, Americas, EMEAI, Investing (Investment Management), Portfolio Construction and Optimization, Responsible Investing, Asia Pacific, Asset Owners, Hedge Funds, Equities, Research Paper, NAGY Zoltan, KASSAM Altaf, Asset Managers (Quant or Fundamental), general

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Do institutional investors sacrifice risk-adjusted returns by incorporating ESG considerations? In this paper, we analyze two relatively high tracking error global strategies constructed using ESG data — a Tilt strategy and a Momentum strategy — and find that both model portfolios outperformed the MSCI World Index over the last eight years, while also improving the ESG profile of the portfolios. These backtested model portfolios show an example of how institutional investors with the tolerance to take some active risk, while at the same time looking to improve the ESG profile of their portfolios on a systematic basis, could incorporate such strategies in their investment processes.

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