Environmental, social and governance investing now is in the trillions of dollars of assets, yet ideas about it hurting performance still persist, according to Guillermo Cano, executive director of Equity Solutions for MSCI, which just released a paper disproving three myths regarding ESG and factor investing.
One surprise of the findings, Cano told ThinkAdvisor, was how much ESG information was available on almost every stock. “We now have the ability to look at the ESG score exposure of virtually the entire MSCI universe,” he said.
He added that when it comes to portfolio construction to achieve a variety of different objectives, investors “don’t need to shy away from the space just because they may have preconceived notions of what ESG does and doesn’t bring to the table because what we’re saying here is there is enough depth of good ESG companies that can contribute to almost any type of portfolio.”
As both factor and ESG investing continue to grow in usage by managers, the study explored how both work together. The study used data from top-decile ESG manager portfolios between Dec. 31, 2013, and Dec. 31, 2017.
Myth #1: ESG is just another way of saying quality
A previous study showed positive correlations between quality-style factors and ESG scores, but they also found that ESG scores could “have been improved without a meaningful impact on exposure to the quality factor.”
Studying the active return of top ESG manager portfolios from 2013 through 2017, using the Barra Global Total Market Equity Model for Long-Term Investors, MSCI excluded and included ESG criteria.
By excluding ESG criteria, it was found the quality factor contributed 32 basis points to active return. However, when ESG was included, it returned 27 basis points while the quality return reduced slightly to 25 basis points. The conclusion was “while the return contribution from industry, specific and other style factors showed more meaningful shifts, the fact that the return from quality remained relatively stable suggests it is distinct from ESG.”
Cano said that “having ESG does not negate or wipe out the exposure to quality. It does reduce it a little bit because there may be some overlap with ESG and quality, but it doesn’t mean they are the same thing.”