The MSCI Factor ESG Target Indexes
categories: Indexes, Americas, EMEAI, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Responsible Investing, Asia Pacific, Asset Owners, Research Paper, KULKARNI Padmakar, Asset Managers (Quant or Fundamental), ALIGHANBARI Mehdi, DOOLE Stuart, general
Institutional investors are moving toward integrating ESG criteria into their portfolios and their factor allocations in particular. But they face key challenges in doing so: How can they enhance their strategies’ ESG profiles while achieving the desired exposure to their target factors? Our research shows this can be achieved by simultaneously incorporating ESG integration alongside factor exposure targeting in index construction. The MSCI Factor ESG target indexes’ “one-step” approach achieved significant improvement of the ESG profile of a single- or multi-factor index relative to its market-cap-weighted parent with modest or no negative impact on the indexes’ ability to capture factor return premia over the December 2007 to June 2017 study period.