The evidence is piling up against advisors who remain skeptical on environment, social and governance investing. A recent study by Amundi SA found that government actions and corporate scandals have forced a “wake-up call” to scrutinize companies for ESG friendliness, something even sovereign wealth funds and central banks are acting on.
The study states, “As ESG is an issue that can no longer be overlooked, regulators are joining the conversation,” for example, the European Union is already working on a framework to “harmonize” an approach toward socially responsible investing.
Here’s the rub: In its study looking at two periods, 2010-2013, and 2014-2017, Amundi found that “between 2010-2013, being a responsible investor would have tended to penalize both active and passive European and North American portfolios.” In fact, the study found only environmental-focused passive investors in the Eurozone would have “enjoyed outperformance,” while governance and social focused portfolios would have been neutral or negative performance.
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However, things are better from 2014-2017, in that the study found “responsible investing was generally a source of outperformance in the Eurozone and North America.” Further, although all ESG areas performed well in the Eurozone, the governance “pillar” dominated. In North America, all pillars did well, with environmental being the strongest.
Other findings included that:
- ESG-induced performance improvements must be implemented carefully: there is a tipping point beyond which ESG score improvements reduce the investment universe and hence, can negatively impact diversification and performance.
- Responsible investing has become a beta strategy in the Eurozone, but remains an alpha strategy in North America.
- ESG screening does not necessarily improve drawdown management.
- To seize the benefits of ESG investing for the portfolio profile, passive investors need to accept additional, yet controlled, trading error compared with capitalization-weighted benchmarks
Real World: Nuveen
Martin Kremenstein is head of ETFs for Nuveen, which of its almost $1 trilllion in AUM, has about $20 billion in ESG across all assets. Of that, $410 million is in ESG ETFs. Eight of its ETFs are ESG funds, the first five of those launched in December 2016. Kremenstein told ThinkAdvisor that they observed from their early back testing that the only significant lag they found was in the large cap growth “and that was very much due to [us] not having high FANG exposure,” he said.
“[What we’ve seen] is that incorporating ESG with other factors can enhance performance, and mostly in value, which makes sense. Value is looking for well-priced stocks, and ESG can really be seen as another way of looking at quality…” he says.
He does believe standardization of reporting and data points for ESG “would be great. It would make our lives a lot easier,” although the Nuveen team is “able to measure those factors” effectively