Nordea “As ESG performance has grown significantly in importance for companies and asset managers in recent years, it's time to look at the numbers. Is ESG screening a worthwhile tool? In a word, yes. High ESG focus contributes to risk mitigation; our research shows this is mirrored in strong operational and share price performance. We also note that predictive attributes as to future earnings stability and share price volatility suggest that ESG research belongs in company valuation. We argue that companies and investors simply cannot afford not to care.
Key conclusions: We see solid evidence that ESG matters, both for operational and share price performance The relative performance of the top versus bottom ESG performers amounted to as much as 40% in 2012-15 ESG is largely uncorrelated with our quant factors, and incorporating it adds alpha to our value and quality strategies.
ESG as a driver for operational improvement. We find a consistent correlation between ESG ratings and operational metrics. For example, companies with top ESG ratings have higher ROE and ROCE, and lower net debt/EBITDA than the market. Returns, margins and share prices are also more stable for the top-rated companies and we find that improving ESG performance bolsters stability in returns, implying it is not a lagging indicator.
ESG adds alpha to already proven quant factors We find ESG of great interest as an addition to our quantitative framework. An intuitive auto-correlation between ESG and quality, which share a lot of characteristics, did not materialise, but ESG added alpha to our quality strategy.
This chimes with a recent BAML Study using a different ESG database – see blog here.
You can also see it in conjunction with these papers here:
from MSCI and ESG and higher RoIC companies
The current Arts blog, cross-over, the current Investing blog. Cross fertilise, some thoughts on autism. Discover what the last arts/business mingle was all about (sign up for invites to the next event in the list below).
My Op-Ed in the Financial Times (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.
Some popular posts: the commencement address; by Nassim Taleb (Black Swan author, risk management philosopher), Neil Gaiman on making wonderful, fabulous, brilliant mistakes; JK Rowling on the benefits of failure. Charlie Munger on always inverting; Sheryl Sandberg on grief, resilience and gratitude.
How to live a life, well lived. Thoughts from a dying man. On play and playing games.
A provoking read on how to raise a feminist child.