ESG Investing

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:

Responsible Environmental Management

Environmental Management

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

Active Social Engagement

Social Engagement

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

Good Governance Practices

Governance Practices

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

We put responsible practices to work in our own day-to-day operations. We are committed to diversity in our workforce, an inclusive culture, and equality of opportunity for all, which in turn allows us to unlock the benefits of our diversity to achieve better outcomes through higher collective intelligence.

We are committed to environmental sustainability. As a result, we advocate resource conservation within our operations, support employee-initiated conservation initiatives, and seek to offer well-designed investment strategies that value responsible environmental management. We collaborate 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 conduct ongoing research activities that extends our understanding—and the investment industry’s—of the benefits and challenges associated with ESG adoption to improve ESG practices both within and outside the financial industry. We seek to offer investment strategies that meet a diverse set of investor preferences, while delivering superior expected returns over a full investment cycle. 

Research Affiliates is a signatory of

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 because they relate to investment outcomes. Thus, we are particularly interested in the research related to this issue. Our own research, as well as research by others, leads us to conclude that certain measures closely related to ESG tenets can be additive to returns and company performance, particularly as they pertain to governance and diversity.

We find 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 RA product suites since 2005 as well as in our dedicated ESG products.

At Research Affiliates, diversity has long been an important topic of research and crucial to the management of our 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 when measured as a level of collective intelligence and firm financial performance.

An academic consensus on the investment benefits of other ESG factors has not emerged. Our own research highlights some of the current challenges related to consistent data and lack of history. Research Affiliates believes, however, that thoughtfully designed systematic ESG strategies can improve performance and/or reduce risk while delivering on the objectives of ESG investing.

Our letter to the SEC in support of climate disclosure rule proposal

RAFI ESG Index series explained by Rob Arnott, Feifei Li, and Ari Polychronopoulos.


2021 ESG Survey Report


ESG Positioning Report

ESG Spot Positioning

Integrating ESG

Research Affiliates created our first ESG index strategies in 2005 as custom indices for institutional asset owners to allow for the exclusion of controversial industries. In recent years we have gone further, creating investment strategies that further incorporate ESG metrics into certain index methodologies. A sampling of our ESG strategies include the

  • RAFI ESG Index Series—Helps investors achieve the dual objectives of social responsibility and long-horizon outperformance through a thoughtfully designed smart beta strategy. This integrated ESG approach uses fundamental weighting and supplements traditional ESG metrics with both financial discipline and diversity for improved return potential. In addition, the index series excludes fossil fuel, weapons, tobacco, and gaming companies.
  • RAFI Multi-Factor Climate Transition Index Series—Provides diversified exposures through allocations to the value, low volatility, quality, and momentum factors, while simultaneously incorporating specific objectives related to greenhouse gas emissions reductions and the transition to a low-carbon economy. The index is designed to meet the requirements for Climate Transition Benchmarks as specified by EU regulations.
  • RAFI Fundamental Reduced Carbon Pathway Index Series—Reduces carbon intensity by a specific amount each year, creating a pathway for carbon-intensity reduction over time. This approach is designed for investors who wish to both retain the benefits associated with the Fundamental Index methodology and reduce the strategies’ exposure to carbon-intensity levels.

ESG Publication Series

Necessary Trade-Offs: Climate vs. Investment Objectives for Value Strategies
By Tzee Chow, Feifei Li, Ari Polychronopoulos
At certain times, client mandates encompass competing objectives. Today, the competition is frequently between social and investment objectives. We examine the trade-offs investors must be prepared to make if they seek to construct a deep-value strategy concurrently with applying a carbon reduction constraint.
Carbon Intensity for Climate Mitigation: Clearing Up “Scaling” Confusion
By Chris Brightman, Vitali Kalesnik, Ari Polychronopoulos, Joseph Shim
Investors can choose one of two popular scaling methods for carbon emissions’ comparisons across companies. Our analysis guides investors in making this important decision.
ESG Is a Preference, Not a Strategy
By Brent Leadbetter, Ari Polychronopoulos
We believe the term ESG strategy is a mischaracterization. The underlying investment process drives the return of the chosen investment strategy, while the ESG preferences reflected in the securities selected for the portfolio do not. We make this distinction not to disparage ESG investing, because we actually view this trait as a benefit and value the ability to align our portfolios’ composition with our beliefs without a meaningful impact on performance.
Green Data or Greenwashing? Do Corporate Carbon Emissions Data Enable Investors to Mitigate Climate Change?
Absent mandatory reporting, data providers estimate half of corporate emissions data. Thus, such data fare poorly in identifying the worst emitters and provide little information to identify green companies in brown sectors. Published on SSRN.
Is ESG a Factor?
By Ari Polychronopoulos, John West
Applying the definition of factor robustness established by our Research Affiliates colleagues in their 2016 award-winning paper, we determine that ESG is not a factor. Nevertheless, the importance of ESG as an investing strategy is undeniable. We explore how greater clarity around defining ESG can quicken the pace of ESG integration in equity portfolios.
What a Difference an ESG Ratings Provider Makes!
The need for ESG ratings to help investors construct portfolios in line with their ESG preferences is acute. Unfortunately, both quality and consistency of ratings can hamper the process. We compare the ratings of two well-known ESG ratings providers to highlight why investors need to have a solid understanding of their provider’s methodology.
The Time Is Now: Climate Transition Investing for US Investors
By Chris Brightman, Vitali Kalesnik, Ari Polychronopoulos
Europe is a step ahead of the United States in climate-related regulation, but we expect a similar regulatory structure will be enacted soon in the United States. US investors have an opportunity now in planning how to align investment decision making with the provisions already outlined by EU regulators.