Risk Control Techniques for Social Investing

Abstract

Plan sponsors can use industry standard risk management tools to achieve more consistent and competitive results in their socially constrained mandates. Multiple-factor risk models and portfolio optimization tools are especially valuable in the management of portfolios with social constraints. Plan sponsors can apply risk management tools and concepts in at least three different ways. They can use portfolio risk models to help construct the lists of socially excluded securities; identify portfolio managers who can use optimization models and risk measurement tools to offset, at least partially, the gaps created by the exclusion of particular securities; and use manager optimization tools to build a team of managers who will have the opportunity to achieve targeted levels of value-added and active risk similar to unconstrained mandates.