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



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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