ESG in Factors

Ying Chan, Ked Hogan, Katharina Schwaiger, Andrew Ang

2020 | Practitioner | ESG & Factors, Portfolio Construction

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.