Responsible investing: factor friend or foe?

Can environmental, social and governance concerns (ESG) fit within a factor-based portfolio? In this article, we tackle two issues: the inconsistency in methodologies for ESG scoring, and ways to integrate ESG considerations into factor portfolios.

As growing numbers of investors seek to adopt the principles of responsible investing, the world of factor based strategies is far from an exception: 55% of European asset owners surveyed in 2018 stated they were looking to integrate ESG considerations within their factor portfolios.

But no clear picture has emerged so far about how best to achieve this goal, despite extensive research over recent years (albeit relying predominantly on backtested data).

Most likely, we are on a long journey until there is sufficient clarity on what this feature of portfolio construction will do from a risk-and-return perspective. Should the ‘responsible’ portion of portfolios be managed separately or is it more effective to integrate ESG considerations at the factor level?