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ESG Investing at Research Affiliates

Research Affiliates and our affiliated entities support investors who wish to promote responsible environmental management, active social engagement, and good governance practices (ESG) with their investment choices. We define the elements of ESG as practiced by an entity as follows:

Safety/Management

Responsible Environmental Management

Performing as a good steward of the natural environment, measured using a broad array of environmental metrics.

Diversity

Active Social Engagement

Managing relationships with employees, suppliers, customers, and the community with respect and with appreciation of diverse viewpoints.

Governance

Good Governance Practices

Focusing on long-term value creation and appropriately balancing the interests of a company’s many stakeholders.

We are committed to putting responsible practices to work in our own day-to-day operations, as well as to collaborating on ESG investing with our partners—data providers, index calculators, asset managers, and industry groups, for example—to offer well-designed ESG strategies for investors. As a research-centric firm, we are also committed to ongoing research activities that will extend our understanding—and the investment industry’s—of the benefits and challenges associated with ESG adoption, in order to help improve ESG practices both within and outside the financial industry.

The Research Affiliates ESG initiative is a signatory of:
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Our Research into ESG

Given the fiduciary responsibilities faced by institutional investors, we recognize that the risk and return consequences of various ESG strategies are extremely important as it relates to investment outcomes. Thus, we are particularly interested in the research related to this issue. Both our own research as well as research by others has led us to conclude that certain measures closely related to ESG tenets can be additive to returns and company performance, particularly as it relates to governance and diversity.

We have found that financial metrics related to corporate governance are associated with better investment performance as measured by low accounting accruals; conservative issuance and dilution practices; high profitability; and conservative investment. These metrics have been incorporated in multiple Research Affiliates product suites since 2005 as well as in our dedicated ESG products.

At Research Affiliates, diversity has long been an important topic in our research and in the management of our own business. Diversity in background, education, culture, frame of reference, and experience leads to diversity in thinking and ideas, and strengthens the foundation of our firm. A growing body of literature documents a positive relation between greater diversity and outcomes measured as a level of collective intelligence and firm financial performance.

Whereas an academic consensus on the investment benefits of other ESG factors has not emerged, Research Affiliates believes that thoughtfully designed systematic ESG strategies can improve performance and/or reduce risk while delivering on the objectives of ESG investing.

ESG Publication Series

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Expected 2018

Unlocking Value in ESG Investing Traditional ESG metrics address important aspects of social responsibility, but they may not ensure expected outperformance to a satisfactory degree. Fortunately, recent research has identified ESG-related attributes that are associated with positive investment performance and can be combined with smart beta.
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February 2018

The Dilution Factor: Governance Explanation of Issuance Effect Existing explanations for dilution include mispricing and overinvestment. A new explanation may be that managers dilute shareholders to enhance their own compensation.
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Expected Q1/Q2 2018

A Survey of ESG Investment Processes We survey commercial smart beta indices to identify the common themes in their investment processes and evaluate their respective pros and cons.
Universal Definition

 

Expected Q1/Q2 2018

A Universal Definition for ESG The lack of standard reporting and high quality data has hindered the growth of ESG in investing. We survey the scoring methods of major ESG research institutions and data providers to summarize the emerging trends in ESG criteria.
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