No Good Deed Goes Unpunished? Social vs. Investment Objectives

Abstract

Increasing interest in sustainable investing means managers are tasked with customizing portfolios to reflect investors' preferences on social issues, while also maintaining a certain investment style. Often, these are competing objectives. We investigate how the application of a carbon reduction constraint impacts a naïvely constructed global equity value strategy. Our findings show that a company’s valuation is highly correlated with its carbon metrics, creating an implementation challenge for investors who desire a portfolio that exhibits both deep-value and low-carbon characteristics. Investors can benefit by an understanding of the limitations presented by their dual objectives in order to make realistic trade-offs.

Keywords: Factor investing, value investing, ESG, SRI, impact investing, climate transition, carbon reduction, custom indexing.

JEL Classification: G11, G23, Q5, Q54, Q57, O16