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An Integrated Approach to Quantitative ESG Investing

Mike Chen and George Mussalli
The Journal of Portfolio Management Ethical Investing 2020, jpm.46.3.065; DOI: https://doi.org/10.3905/jpm.2020.46.3.065
Mike Chen
is a director of portfolio management at PanAgora Asset Management in Boston, MA
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George Mussalli
is the chief investment officer of PanAgora Asset Management in Boston, MA
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Abstract

ESG investing is an area of active interest for both the investment and academic communities. Despite the intense interest, there currently is no agreed upon definition of ESG investing, or how to best build investment portfolios that incorporate both return and sustainability dimensions. (Both are important for sustainability-minded investors.) In this article, the authors categorize the broad types of ESG investing currently in the market and introduce an ESG investment framework. This results in a portfolio that optimally combines the dual objectives of alpha and sustainability outperformance.

TOPICS: Portfolio theory, portfolio construction, ESG investing

Key Findings

  • • It is possible for ESG factors to also generate alpha, provided materiality is taken into consideration.

  • • Standard methods of materiality definition, based on sectors, can be limiting and are not the optimal axis to measure materiality.

  • • ESG investing is based on investor’s sustainability values, which must be incorporated as part of ESG portfolio construction.

  • • In situations where the asset owner’s sustainability values and alpha generation do not align, a quantitative approach can be used to graph an ESG-efficient frontier.

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The Journal of Portfolio Management: 47 (5)
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Investment Models 2021
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An Integrated Approach to Quantitative ESG Investing
Mike Chen, George Mussalli
The Journal of Portfolio Management Jan 2020, jpm.46.3.065; DOI: 10.3905/jpm.2020.46.3.065

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An Integrated Approach to Quantitative ESG Investing
Mike Chen, George Mussalli
The Journal of Portfolio Management Jan 2020, jpm.46.3.065; DOI: 10.3905/jpm.2020.46.3.065
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  • Article
    • Abstract
    • Terminology
    • THE CURRENT ESG INVESTMENT LANDSCAPE
    • PILLAR 1: ESG ALPHA FACTORS
    • PILLAR 2: INVESTMENT MATERIALITY METRICS
    • PILLAR 3: INTEGRATED ESG PORTFOLIO CONSTRUCTION
    • CONCLUSIONS
    • ADDITIONAL READING
    • APPENDIX
    • ENDNOTES
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