Scientific Beta

In the area of ESG investing, while there is no consensual research at this stage that leads to a priced ESG factor being defined, a recent article co-authored by Frank J. Fabozzi, Professor at EDHEC, shows that the exclusion of stocks with negative ESG scores is not necessarily detrimental to the performance of a portfolio if, following this exclusion, the investor reconstitutes the traditional factor exposures that the exclusion can alter, because these sin stocks tend to be well exposed to traditional rewarded factors. 

ERI Scientific Beta was set up by EDHEC-Risk Institute in 2012 to favour the adoption by the investment industry of EDHEC's research results in smart beta and factor investing. We continue of course to rely on EDHEC's research to affirm our investment beliefs.

In the area of ESG investing, while there is no consensual research at this stage that leads to a priced ESG factor being defined, a recent article co-authored by Frank J. Fabozzi, Professor at EDHEC, and David Blitz, Head of Quantitative Equity Research at Robeco, shows that the exclusion of stocks with negative ESG scores is not necessarily detrimental to the performance of a portfolio if, following this exclusion, the investor reconstitutes the traditional factor exposures that the exclusion can alter, because these sin stocks tend to be well exposed to traditional rewarded factors. Indeed, it is this favourable factor exposure that explains the good performance of sin stocks over the long term, rather than their anti-ESG score per se.

This reconstitution of the right factor exposures after excluding stocks with poor ESG scores is a core part of the ESG and factor investing approach promoted by ERI Scientific Beta and the research conducted by our colleague, Professor Fabozzi, reinforces our confidence in the approach.

The article, entitled "Sin Stocks Revisited: Resolving the Sin Stock Anomaly", is forthcoming in the Fall 2017 issue of the Journal of Porfolio Management.