TY - JOUR T1 - The Sleeping Beauty and the Green Swan: How Should Smart Beta Stand the ESG Challenge? JF - The Journal of Impact and ESG Investing SP - 55 LP - 70 DO - 10.3905/jesg.2022.1.053 VL - 3 IS - 1 AU - Hamza Bahaji Y1 - 2022/08/31 UR - https://pm-research.com/content/3/1/55.abstract N2 - Smart beta is a disruptive financial innovation that we believe will be disrupted by the ESG transition. How should smart beta managers position their products within the large ESG spectrum and how should they align their investment objectives and adapt their frameworks in order to achieve those ESG outcomes? This article discusses the main emerging directions in the industry to overcome those challenges. We report empirical evidence from recent return patterns of top ESG-rated stocks that investors’ preferences have shifted toward ESG, which might signal that some sustainability risk aspects have started to be priced in. This finding provides the rationale for using ESG-based factors in multifactor strategies in expectation of a future development of related risk premia. We also build on the case of the minimum-volatility strategy to show how smart beta managers can mitigate sustainability risks in their portfolio construction frameworks without affecting their original investment objectives. ER -