ESG integration aims to improve financial performance and/or mitigate financial risk by considering ESG factors explicitly and systematically in investment analysis and decisions to lower risk and generate returns.
As a fiduciary, we believe that material ESG factors can affect the performance of investments to varying degrees across companies, sectors, regions, asset classes, and over time.
The objective of integration is not to achieve particular environmental, social, or governance goals, but considering material ESG components as a driver of risk and/or return.
ESG integration encompasses the use of qualitative and quantitative ESG information in the investment processes, with the objective of enhancing investment decision-making. Integration of ESG issues can be used to inform economic and industry research, at the stock or issuer level or at the portfolio construction level.
Integration of ESG issues into alternative-weighted ESG indices in which the constituents’ security weighting takes into account the ESG characteristics of the company or country. ESG data are included in the investment process and could result in upward or downward adjustments to the weights of securities, including to zero.
Integration here involves identifying correlations between ESG factors and price movements that can generate alpha and/or reduce risk. Models are constructed to integrate ESG factors alongside other factors, such as value, size, momentum, growth, and volatility.
The main approaches to integrating ESG factors into quantitative models can involve adjusting the weights of:
Important Risk Disclosures
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The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.
Responsible-Factor (R Factor) scoring is designed by State Street to reflect certain ESG characteristics and does not represent investment performance. Results generated out of the scoring model is based on sustainability and corporate governance dimensions of a scored entity.
A Smart Beta strategy does not seek to replicate the performance of a specified cap-weighted index and as such may underperform such an index. The factors to which a Smart Beta strategy seeks to deliver exposure may themselves undergo cyclical performance. As such, a Smart Beta strategy may underperform the market or other Smart Beta strategies exposed to similar or other targeted factors. In fact, we believe that factor premia accrue over the long term (5-10 years), and investors must keep that long time horizon in mind when investing.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Past performance is not a reliable indicator of future performance.