// WETENSCHAP EN PRAKTIJK
ESG-RELATED MANDATES AND PERFORMANCE IMPLICATIONS By Leola Ross
Let’s cut to the conclusion: Does an ESG-related mandate require a performance hit? No. While including environmental, social and governance (ESG) data points in the investment process has become tablestakes, ESG factors do have implications for the short- and long-term returns of an investable security. But we believe both ESG goals and performance goals can be reached together.
HOW DOES ONE INCORPORATE ESG INTO INVESTING?
Photo: Archive Russell Investments
We believe that ESG factors impact security prices. Therefore, it is the job of investment managers to understand all of the characteristic for every security they hold… or choose not to hold. Environmental, social and governance factors can impact security prices. To ensure the most complete analysis of return opportunities and potential risks,
investment managers should have an understanding of ESG factors. We believe it adds value to a skillful investment process. To that end, we evaluate all active portfolios on their integration of ESG into their investment processes. We have found many managers who integrate ESG very skillfully. Their portfolios are not typically considered ESG portfolios, but on close examination the relevance of ESG to their processes is real and additive.
ISN’T ESG ABOUT EXCLUDING SECURITIES, LIKE TOBACCO OR CARBON EMITTERS, FROM PORTFOLIOS? In many cases, investors want to include or exclude securities because of a specific values-based world view. Alternatively, investors seeking to capture return opportunities are looking at ESG performance. For example, a growth investor may see green energy as a growth opportunity or a restructured governance process as a way to realize a price correction. These two factors, values and investment value, are different. But either may lead to excluding, and even including, specific securities. Is this two-pronged approach harder than investing for just one goal or the other? Possibly.
EXAMINING THE UNIVERSE OF ESG MANAGERS
Leola Ross
98
FINANCIAL INVESTIGATOR
NUMMER 5 / 2019
We review managers in two ways. In our qualitative review, we examine the incorporation of ESG into the investment process. We find that a small number of managers do this very well. In our
With an intense focus on risk management, we find that lowering the carbon footprint can be achieved with similar performance to equivalent products without the carbon reduction.
quantitative review, approximately half exhibit above-market ESG metrics. In other words, in looking to outperform their benchmarks, approximately half of the manager universe exhibits above average ESG metrics. So then, can we deliver an ESG mandate while delivering strong performance? We believe the answer is yes.
CARBON FOOTPRINT AS A PROOF POINT A typical mandate we see from our investors is a desire to shrink the carbon footprint of their portfolio – typically by 50%. While trying to achieve the investors’ ESG goals, maintaining investment performance is essential in order to avoid unintended and unrewarded risk. With an intense focus on risk management, we find that lowering the carbon footprint can be achieved with similar performance to equivalent products without the carbon reduction.