RT Journal Article
SR Electronic
T1 ESG in Factors
JF The Journal of Impact and ESG Investing
FD PMR
SP 26
OP 45
DO 10.3905/jesg.2020.1.1.026
VO 1
IS 1
A1 Ying Chan
A1 Ked Hogan
A1 Katharina Schwaiger
A1 Andrew Ang
YR 2020
UL https://pm-research.com/content/1/1/26.abstract
AB Environmental, social, and governance (ESG) signals are an important part of factor-based investing strategies as they can stem from the same economic rationales as general factor premiums. Because factors are broad and diversified, building portfolios by jointly optimizing factor exposures with ESG and carbon outcomes can result in similar historical performance as benchmark factor portfolios that do not include those considerations. We show how sustainable signals, which often involve alternative data, can be integrated in the definitions of factors themselves: We offer two examples on green intangible value and corporate culture quality which enhance traditional financial value and quality factors, respectively.TOPICS: Analysis of individual factors/risk premia, factor-based models, ESG investingKey Findings• Environmental, social, and governance (ESG) signals are an important part of factor-based investing strategies, as they can stem from the same economic rationales as general factor premiums.• Building portfolios by jointly optimizing factor exposures with ESG and carbon outcomes can result in similar historical performance as benchmark factor portfolios that do not include those considerations.• Sustainable signals, which often involve alternative data, can be integrated in the definitions of factors themselves: We offer two examples on green intangible value and corporate culture quality that enhance traditional financial value and quality factors, respectively.