Socially responsible investing provides investors with a means to manage environmental, social, and governance (ESG)-related exposures, but much remains unknown about the performance potential of these strategies. We believe the best path for improved return is through portfolio construction, by combining ESG objectives with smart beta.
According to the Research Affiliates investment beliefs, investors have preferences beyond risk and return—for example, investing in companies that follow socially responsible business practices. Socially responsible investing, which provides investors with a means to manage environmental, social, and governance-related exposures while also promoting social and environmental issues, has grown in popularity in recent years. A lack of long-term consistent data limits research into ESG these strategies, however, so much remains unknown about their performance potential.
The empirical research results we have on the investment merits of ESG are mixed for performance, but less ambiguous for risk. We prefer not to shy away from meeting investor preferences because of what remains unknown about the investment merits of ESG. We believe the best path for improved return potential is through portfolio construction—by combining ESG objectives with smart beta and by leveraging metrics, such as financial discipline and diversity. These metrics are wholly consistent with ESG investing and support long-term value creation and sustainable growth.
Research Affiliates, our sister company, has published a number of articles to help investors
navigate the relatively new world of ESG investing and to satisfy the dual objective of socially responsible investing and excess returns.