RAFI ESG is a thoughtfully designed smart beta strategy that aims to help investors achieve the dual objectives of social responsibility and long-horizon outperformance.
The strategy does this by emphasizing two key elements: (1) applying the Fundamental IndexTM approach, which has historically been shown to outperform the cap-weighted benchmark, and (2) supplementing traditional ESG metrics by adding the dimensions of financial discipline and gender diversity.
“We wanted to deliver a transparent, broadly diversified, and customizable ESG strategy without sacrificing returns,” said Vitali Kalesnik, PhD, Partner and Head of Equity Research. “Our research shows that we can achieve this objective by combining our Fundamental IndexTM approach to investing with a broader set of ESG measures—specifically, by including measures of financial discipline and diversity. RAFI ESG addresses the needs of investors seeking to make an ESG impact while preserving the potential for added returns.”
As part of Research Affiliates’ ongoing ESG efforts, the firm is collaborating with BNP Paribas, a global leader in the ESG and sustainable investing space. As an exclusive provider of structured products linked to the RAFI ESG indices, and a swap counterparty, BNP Paribas will provide marketing support for the implementation of these strategies.
“Research Affiliates is well known throughout the industry for their smart beta offerings and we are thrilled to work with them on RAFI ESG, which provides investors across regions an opportunity to invest in the concept that diversity is a key component of success for corporations.” said Neven Graillat, Head of Sustainable Investment Solutions, Global Markets, at BNP Paribas. “Sustainable investing is about finding the right balance among risk, return, and impact. RAFI ESG aligns well with this market trend by incorporating financial assessment on the return side, controversies management and global governance on the risk side, and diversity on the impact side.”
The RAFI ESG strategy takes an integrated approach to ESG investing by incorporating RAFI weights with a composite score of each security’s Environment, Social, Governance, Financial Discipline, and Diversity ratings.
The financial discipline score uses metrics that are associated with generating sustainable long-term performance. For the diversity score, metrics are used to determine a firm’s commitment to gender diversity, with particular attention paid to women in management, in the C-suite, and on company boards.
“Diversity has long been paramount at Research Affiliates. Diversity in backgrounds, ideas, and experiences leads to the thought-provoking insights that are the foundation of our firm’s collective intelligence (CI), and high CI is associated with better financial outcomes and greater innovation," says Katy Sherrerd, PhD, Research Affiliates’ President and COO.
“Together with Research Affiliates, we will continue to provide access to leading-edge quantitative investment strategies while simultaneously supporting diversity and inclusion, in particular, through public disclosure and sustainability of long-term performance,” said Hervé P. Duteil, BNP Paribas’ Chief Sustainability Officer in the Americas. “We look forward to continuing to expand the offering of market-based solutions that offer investors the opportunity to put their money to work while addressing social and environmental challenges.”
Research Affiliates also plans to launch a stand-alone RAFI Diversity strategy at a later date in 2018.
Indices based on both the RAFI ESG and RAFI Diversity strategies will be published through RAFI Indices, LLC, a sister company of Research Affiliates.