Environmental, social and governance (ESG) has grown in interest in the investment world and experts are now wondering whether it can become an investment factor. According to EFT Trends, ESG could join value, growth, momentum and other factors sometime in the future.

Style Analytics found that ESG factors can be added to the momentum investment factor with ease – and doing this has also been shown to produce higher returns.

An article in Funds Europe posed an interesting question, “Could smart beta and environmental, social and governance investing be a combined as a type of investment factor?” The question was posed after the fact that last year almost half of institutional investors had some form of smart beta allocation and research showed that ESG growth soared among the world’s largest asset managers.

ESG could be combined with factors like value and growth. According to SEI’s Eugene Barbaneagra, “The quality factor tends to favor companies with large profits relative to their asset base” and that “having a high-profit base tends to allow a company to afford to mitigate a lot of ethical issues." 

Knowledge Center How Responsible Investing Fits into our Manager Research Process Integrating ESG rankings into manager research and selection

With the continued growth and ESG’s possible cemented future in the investment world, it is important that investment firms embrace ESG or potentially face underperformance. The rise of ESG continues, drawing the attention of the Securities Exchange Committee and becoming one of the most searched financial terms in 2019.

SEI has recently hired experts dedicated to responsible and sustainable investing, as well as investing $30 trillion assets in sustainable strategies.

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*2018 Global Sustainable investment Review, Executive Summary

The goal of smart beta is to obtain excess returns over a benchmark, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio.

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