Quant ESG Axioma Study. Residual company specific ESG (not regressed by factor models) tilts often outperform and rarely underperform “a question for PMs is to what extent are ESG scores different from the factors found in commercial fundamental factor risk models, such as value, size, industries and countries?…
...To the extent that ESG scores overlap with traditional factors, then ESG can be interpreted as beta (“smart beta” to the marketers); to the extent these scores do not overlap with traditional factors, then ESG can be interpreted as residual, idiosyncratic or company specific (“alpha” to the quants)...”
Me: company specific ESG theoretically should be a skill for fundamental managers. ESG is not time invariant in materiality or other domains.
“...be wary of ESG studies that treat the historical data in a uniform manner...variable history make it challenging to find statistically
meaningful conclusions based....that said, with the notable exception of the US prior 2016, Residual ESG has rarely underperformed.. [this] should be welcome news to skeptical PMs who may be under pressure to include ESG in their processes…”
Study is technical, not peer reviewed, relies on Owl data but adds to research on ESG Quant.
The study suggests current ESG tilt indicies are potentially not well constructed: ESG indices often have considerable tilts to other factors, such as value and growth, which are just as large as the active ESG tilt, meaning it is difficult to attribute any outperformance to an ESG screen.
“A significant portion, if not the majority, of existing ESG indices are constructed using a simple sorting approach....While this approach is simple to implement and explain, it suffers from the defect that the active tilt on ESG is typically small. In many cases, the active tilts on other risk model factors such as value and growth are just as large.”
It also notes “there is no standard, accepted methodology for combining separate E, S, and G scores into a composite ESG score. It is possible, indeed, likely, that ESG scores from different vendors will exhibit different performance characteristics. Hence, there is yet one more reason to be cautious when forming expectations about ESG: it varies across both time and vendors.”
A different look at this area, but using the Thomson Reuters Data set and by BAML can be found here.
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My Op-Ed in the Financial Times (My Financial Times opinion article) about asking long-term questions surrounding sustainability and ESG.
A long read on Will Hutton looking at Brexit causes and solutions.
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.
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