A factor-tilt approach to ESG investing

Marc Weibel and Tsuyoshi Iwata

Journal of Sustainable Finance & Investment, 2026, vol. 16, issue 2, 392-426

Abstract: This research explores a novel approach to portfolio construction integrating Environmental, Social, and Governance (ESG) factors through a factor-tilt strategy designed to enhance performance while aligning with ESG principles. Using a US sample of companies and timely ESG data from RepRisk, the study proposes a benchmark-relative, long-only portfolio construction framework that preserves exposure to traditional risk premia while tilting the final portfolio towards a quantitative ESG objective via sequential (multiplicative) tilts. Factor signals are normalized to cross-sectional percentiles and mapped with an exponential function. The methodology combines bottom-up and top-down approaches and neutralizes non-ESG factor exposures relative to the benchmark, allowing attribution of active returns to the ESG tilt. The findings reveal a positive and statistically significant ESG premium relative to both the replicating benchmark and the S&P 500, addressing concerns regarding the lack of forward-looking ESG data. The study contributes to the ESG investing literature by demonstrating the benefits of incorporating timely ESG information into portfolio construction.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jsustf:v:16:y:2026:i:2:p:392-426

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DOI: 10.1080/20430795.2026.2627897

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