Research

ESG Investing

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 potential is through portfolio construction, by combining ESG objectives with smart beta.

Investors have preferences beyond risk and return

According to the Research Affiliates investment beliefs (Brightman, Treussard, and Masturzo, 2014), 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 (ESG)-related exposures while also promoting social and environmental issues, has grown in popularity in recent years, yet much remains unknown about the performance potential of these strategies. A lack of long-term consistent data limits the research into ESG strategies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Empirical results are mixed

The empirical research results that we do 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 leveraging metrics that are wholly consistent with ESG investing and that support long-term value creation and sustainable growth, such as financial discipline and diversity.  

Watch Now: The RAFI ESG approach explained, with a brief intro by Rob Arnott

INTRO AUDIO SOURCE: Interview with Rob Arnott, Newport Beach, CA, on August 21, 2019

Further Insights

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.

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