Which of the following is an active quantitative approach to embed ESG within a portfolio?

The approach of weighting ESG as an idiosyncratic factor in a multi-factor stock selection algorithm is an active quantitative method because it directly incorporates ESG factors into the decision-making process as part of the overall investment strategy. This means the algorithm actively adjusts the portfolio based on the ESG characteristics of the securities being considered, rather than passively relying on ESG scores or metrics. This creates a systematic approach to identify and select stocks that not only fit traditional financial metrics but also align with specific ESG criteria.

This method is distinct from others as it explicitly relies on the active manipulation of weights based on the identified ESG factors, ensuring that the resultant portfolio has a particular tilt towards ESG considerations. Active quantitative strategies typically seek to exploit mispricings or value opportunities in securities by considering various factors, and treating ESG as an idiosyncratic factor falls neatly into this category.

In contrast, other approaches, such as merely considering ESG scores in investment decisions or minimizing tracking error without specific adjustments for ESG metrics, do not represent a truly active quantitative strategy as they lack the systematic incorporation of ESG factors in a way that affects portfolio construction. Additionally, solving the mean-variance optimization problem focuses primarily on risk and return characteristics without the explicit integration of ESG as a transformative