Playing by the rules

Incorporating sustainability factors in rules-based equity strategies

14. Mär 2019

This paper focuses on the practicalities of incorporating sustainability factors in rules-based equity strategies in a robust and efficient way.

Not many investment themes have sparked as much controversy and divergence in opinion as sustainable investing. This is not surprising—most investment strategies are constructed with the intention or expectation to achieve certain risk and/or return objectives that are well defined and measurable.

Sustainable investing, on the other hand, tends to be multidimensional, and its impacts on long-term risk and return are not yet fully understood. Additionally, this investment style is characterized by a number of complexities, including multiple objectives (e.g. ethical and long-term investment) and modelling difficulties arising from data coverage, quality and standards. While there is a growing belief that rules-based strategies incorporating sustainable factors may offer investors potential long-term outperformance compared to standard market cap weighted indices, sustainable strategies are not yet directly associated with a particular risk-return profile.