ESG Investing

A Framework for Environmental, Social, and Governance Considerations in Portfolio Design

Topics - ESG Investing Portfolio Construction

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A Framework for Environmental, Social, and Governance Considerations in Portfolio Design

It is often argued that the world is changing and that the impact of Environmental, Social, and Governance (ESG) issues could pose a
significant risk or potential opportunity for pension assets. While this argument may well have merit, it rarely leads to actionable steps or clarity of direction. In some sense it is a call to arms against an unknown enemy. The inherent breadth and ambiguity of issues has resulted in the integration of ESG considerations into portfolio design remaining largely a philosophical push without clarity on the direct and indirect impacts on shareholder value.

This paper proposes a simple framework to consider the impacts of ESG issues with respect to their role in investment decisions. This
framework allows ESG considerations to be disentangled and provides a clearer path for further investigation of the impact of good/bad ESG policies on shareholder value and how these considerations may be appropriately included in the investment decisions of both investors and fiduciaries.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


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AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.