Green Alpha

Abstract

This chapter explores one specific approach of environmental, social and governance (ESG) integration in investment management. It introduces ESG – with a focus on environmental data – as stock-selection signals, alongside conventional value, momentum and profitability factors. The materiality of each key ESG issue varies greatly by industry, especially on the environmental and social pillars. The chapter provides heavily use a small set of common equity style factors to assist us in understanding ESG investing. MSCI ESG rating follows a rule-based methodology designed to measure a company's exposures to long-term, industry-material environmental, social and governance risks. ESG scores are expected to be positively correlated to size, as larger companies typically are also more heavily invested in sustainability reporting and setting up ESG standards. The chapter shows two examples on green intangible value and corporate culture quality that enhance traditional value and quality factors, respectively.