Raising ESG ratings with improved returns

While environmental, social and governance factors may be all the rage in investment strategies, the right tools to measure results of their implementation would make tangible what skeptics might think are the emperor’s new clothes.

Cue researchers Zoltán Nagy, Doug Cogan and Dan Sinnreich from MSCI with their December 2012 paper, Optimizing ESG Risk Factors in Portfolio Construction.

The trio of researchers analyse the effect of ESG ratings on portfolio performance from February 2007 to June 2012. Using MSCI’s World Index as a performance benchmark and asset universe for the optimised portfolios, they also employ the Barra Global Equity Model to build and analyse three families of optimised ESG-tilting strategies.

While the study’s design was initially an enhanced indexing exercise, the researchers also found three possible strategies that can raise ESG ratings and improve active returns. Read on to discover whether ESG factors remain in the world of the fable or bring fabulous returns.



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