Sustainable Investing: Reducing Risk to Create Alpha

Investment Risk and Performance Feature Articles
May 2014 | Vol. 2014 | No. 1
Source: CFA Institute
Deborah Kidd, CFA

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Summary

Sustainable investing is growing globally among large institutional investors that believe investing in companies with lower environmental, social, and governance (ESG) risks will lead to better long-term performance results. A wide variety of investing approaches and sustainability indices exist, creating both opportunity and confusion. ESG-focused portfolios can have performance differences relative to market-weighted portfolios arising from industry and sector biases, country or regional biases, and capitalization-size tilts. Passive investing based on a market-neutral ESG index can minimize such performance biases.

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