No Good Deed Goes Unpunished? Social vs. Investment Objectives
27 Pages Posted: 8 Jun 2022
Date Written: May 25, 2022
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
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