Alternative Thinking

Responsible Asset Selection: ESG in Portfolio Decisions


Topics - ESG Investing

Read Time - 10min

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Responsible Asset Selection: ESG in Portfolio Decisions
  • Environmental, Social, and Governance (ESG) considerations are an increasingly important input in investors’ portfolio decisions. We discuss how these considerations may be incorporated in a portfolio and how they may affect risk and return outcomes.
  • ESG is a broad term that many investors may define differently. Thus, we begin by outlining a framework designed to clarify how ESG may enter an investment process.
  • We focus here on security selection, highlighting the distinction between using ESG signals to enhance the investment view of a security’s risk or return potential and incorporating explicit non-investment objectives into a portfolio.
  • Finally, we leverage a recently developed ESG-efficient frontier framework to show how ESG integration and screening lend themselves to a quantitative investment process and to quantify their expected impact on performance in several practical applications.


About the Portfolio Solutions Group

The Portfolio Solutions Group (PSG) aims to help AQR clients achieve better portfolio outcomes and provide unique insights to the broader investment community.

We thank Paras Bakrania, Lukasz Pomorski, and Alex Sanborn for their work on this paper. We also thank Jordan Brooks, Antti Ilmanen, Thomas Maloney, Toby Moskowitz, Chris Palazzolo, Lasse Pedersen, Scott Richardson, and Dan Villalon for their helpful comments and Ing-Chea Ang and Jatin Bhatia for their excellent research assistance.



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The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. 

Sustainable investing is qualitative and subjective by nature, and there is no guarantee that the environmental, social and governance (“ESG”) criteria utilized, judgment exercised, or techniques employed, by AQR will be successful, or that they will reflect the beliefs or values of any one particular investor. Certain information used to evaluate ESG factors or a company’s commitment to, or implementation of, responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete. ESG investing can limit the investment opportunities available to a portfolio, such as the exclusion of certain securities or issuers for nonfinancial reasons and, therefore, the portfolio may perform differently than or underperform other similar portfolios that do not apply ESG factors.