Thematic Indexing, Meet Smart Beta! Merging ESG into Factor Portfolios
26 Pages Posted: 5 Dec 2017
Date Written: October 18, 2017
Many investors are starting to explore ways to integrate environmental, social and governance (ESG) considerations into their portfolios. Factor portfolios and indices which integrate ESG allow investors to capture both the long-term durable factor premia while allowing them to invest in companies with attractive ESG attributes. Traditional factors and ESG both have strong investment rationale for investors with long horizons. But how should blended ESG-factor portfolios be constructed? This paper discusses several ways in which to integrate ESG in factor portfolios. We show that the choice of which approach depends on the investor’s investment rationale behind integrating ESG, desired exposure, performance expectations, and preference for conceptual consistency.
Keywords: ESG, Smart Beta, Thematic Investing, Portfolio Integration
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