AQR White Paper
It is often argued that the world is changing and that Environmental, Social and Governance (ESG) issues could pose a significant risk or potential opportunity for pension assets. This argument may have merit, but 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 effects on shareholder value.
This paper proposes a simple framework to consider the role ESG issues may play in investment decisions. This framework allows investors to disentangle ESG considerations and provides a clearer path for further investigation of how ESG policies affect shareholder value and how they may be appropriately included in the investment decisions of both investors and fiduciaries.
As a first step, we identify three distinct avenues by which ESG consideration may affect fund investment performance.