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Smart beta: The potential for ESG as an investment factor

Smart_betaNearly half of institutional investors had some form of ‘smart beta’ allocation last year and, separately, research also showed that ESG growth among the world’s largest asset managers was soaring. But could the two – smart beta and environmental, social and governance investing – be combined as a type of investment factor?

In our recent feature, Bruno Taillardat, head of smart beta and factor investing at Amundi, says this is already happening.

“There is a very strong appetite for ESG combined to smart beta in funds,” he says. “Smart beta funds rely on well-structured and disciplined investment processes.”

We also hear that some investment factors react better than others to having an ESG filter applied to them, with ‘quality’ being well matched with ESG.

The quality factor tends to favour companies with large profits relative to their asset base, says Eugene Barbaneagra, portfolio manager for the traditional strategies group at SEI, who adds that “having a high profit base tends to allow a company to afford to mitigate a lot of ethical issues”.

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.

In our report (see link below), we hear that certain investment factors could be boosted if ESG criteria were added to them – but that limiting stock selection by mixing ESG and smart beta could heighten some risks.

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