Integrating ESG Analysis into Smart Beta Strategies

Smart beta strategy is an increasingly frequent approach to investment analysis for portfolio selection and optimization and it can be combined with Environmental, Social, and Governance (ESG) considerations. In order to verify the impact of the integration between ESG and smart beta analysis, first we apply a portfolio rebalancing based on ESG scores on securities selected according to different smart beta strategies (ex‐post ESG rebalancing approach). Secondly, we apply different smart beta approaches to sustainable portfolios, screened according to the issuers’ ESG scores (ex‐ante ESG screening approach). We find that ESG rebalancing and screening are able to impact both on return and risk statistics, but with a different level of efficiency for each smart beta strategy. ESG rebalancing proves to be particularly efficient when it is applied to a “Value” portfolio. On the other hand, when smart beta is applied to ESG‐screened portfolios, “Growth” is the strategy which shows the highest increase in risk‐adjusted performance, particularly in the US. Minimum volatility proves to be the most efficient smart beta strategy for sustainable portfolios. In general, the increase in the level of sustainability does not deteriorate the risk‐adjusted performances of most smart beta strategies.