Practical Applications of An Integrated Approach to Quantitative ESG Investing

Abstract

<h3>Practical Applications Summary</h3> In <b><i>An Integrated Approach to Quantitative ESG Investing</i></b>, from the February 2020 issue of <b><i>The Journal of Portfolio Management</i></b>, authors <b>Mike Chen</b> and <b>George Mussalli</b> (both of <b>PanAgora Asset Management</b>) propose a novel quantitative framework for optimizing both alpha and the environmental, social, and corporate governance (ESG) aspects of a portfolio. Although investors, especially those in the millennial generation, have become increasingly interested in the ESG aspects of the companies within their portfolios, there has not yet been a well-defined process for constructing portfolios that factors ESG principles into a strictly return-oriented model. Chen and Mussalli’s approach is based on three pillars: ESG factors that may also be alpha factors, a unique materiality value that links ESG considerations to alpha, and a portfolio construction framework that is informed by an investor’s ESG preferences. The key strengths of this integrated ESG modeling framework are its flexibility, relevancy, and dynamic nature. <b>TOPICS:</b>Portfolio theory, portfolio construction, ESG investing