Abstract
<h3>Practical Applications Summary</h3> In <b>A Guide to ESG Portfolio Construction</b>, in the April 2019 edition of <b><i>The Journal of Portfolio Management</i>, Michael Branch, Lisa R. Goldberg</b>, and <b>Pete Hand</b>, all of the <b>Aperio Group</b>, present six quantitative environmental (E), social (S), and governance (G) strategies for building or restructuring portfolios to align with investors’ ethical considerations and financial goals. Customizing an ESG portfolio requires trade-offs between investment risk and an investor’s values, whether that means tilting the portfolio toward stocks or sectors that the investor likes, or avoiding ones that it dislikes. In exploring these strategies, the authors propose certain practices and analyze options for ESG portfolio construction that balance risk and the ESG preferences of investors. Acknowledging the challenges faced by investors who want to “do well by doing good,” the authors stress the need for investors to clearly understand their goals and constraints, as well as the complexities intrinsic to trade-offs between risk control and exposure to unwanted securities. The quantitative methods outlined by the authors can lower tracking error but may also increase exposure to unwanted stocks or sectors. To mitigate against such exposure, the authors recommend that investors tap the expanding set of high-quality ESG-scored company data during portfolio construction.
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