Constructing Social Portfolios: A Quantitative Versus Screening Approach

Environmental, social, and governance (ESG) investing has surged in significance within portfolio management, drawing substantial capital toward environmental- and governance-themed funds. The absence of conclusive evidence on the financial materiality of the social pillar, however, has prevented deeper investor engagement. The study, spanning 2013–2021, reveals positive alpha returns linked specifically to the incorporation of social metrics. By employing distinct integration models, the authors challenge the efficacy of negative screening in enhancing social performance at a portfolio level. Contrary to prevalent methods reliant on restrictions, this research demonstrates that sustained improvements in performance can be achieved through a quantitative integration model, upholding risk-adjusted returns without compromise. This study prompts a reassessment of prevailing ESG portfolio construction approaches, advocating for a shift toward quantitative integration strategies for heightened ESG ratings.