Rules-Based Approaches

Incorporating sustainability factors in rules-based equity strategies

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 directly associated with a particular risk-return profile. It is an undisputed fact, however, that the popularity of this investment theme continues to grow, both in active as well as in passive investing.

In this article, we will not be adding further to the debate on why to invest sustainably via index-based strategies, but will focus on the practical topic of incorporating sustainability and implementing these strategies efficiently in a passive strategy.
We firstly discuss portfolio management aspects of replicating ESG/SRI indices; then we demonstrate several methods of constructing custom ESG/SRI rules-based portfolios, including stock exclusions and strategies with systematic ESG tilts.

In the second part, we focus on the design of rules-based strategies that integrate sustainable themes. In particular, our UBS AM approach with regards to climate and governance aware strategies is briefly discussed. We conclude by showing encouraging results to inspire the inclusion of ESG factors as a part of investment process.


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