SRI and performance: impact of ESG criteria in equity and bond management processes

What is the impact on a portfolio’s performance when ESG criteria are applied to the management process? This question has been at the centre of numerous debates for years. Amundi has conducted a scientific study on the topic and the conclusions are published in this document. The work carried out by the quantitative research team associated with extra-financial analysis is based on the SRI processes used at Amundi and certified by Afnor.

Amundi uses a best-in-class approach on a global investment universe. What makes Amundi’s extra-financial rating system unique is that it complements the agency consensus with a subsequent internal analysis. SRI portfolio management is based partly on exclusion criteria for the worst-rated securities and partly on the portfolio’s overall ESG rating, in absolute and relative terms compared to its benchmark.

In this study, we examine whether an ESG signal adds performance when incorporated into a portfolio management strategy. We will show the importance of correcting systematic bias stemming from geographical, sector and style exposure. Without correction, these biases contribute heavily to risk and thus potentially to performance. We will also discuss various correction methods and test the added value of the signal through several simulations (portfolio optimisation and panel statistics). 

This paper also gives insight on how to use the signal in portfolio construction. 

Depending on the management type, the signal of ESG ratings is not used in the same way. Too many constraints in terms of average ESG rating mean that the signal is only used on a few categories of ratings. If we consider the overall consistency between ESG ratings and over- or underweightings in the portfolios to be important, then from this viewpoint, the portfolio with the highest ESG rating is not necessarily the most SRI .

The study revealed no significant underperformance or outperformance over the assessed period. In conclusion, in view of the rigorous methodology used and  from an incompressible risk standpoint, Amundi’s practice of incorporating SRI criteria has not been shown to represent a significant cost on either the European or global investment universes over the observed period. In other words, while significant advancement in the inclusion of ESG criteria is expected in the years to come, likely with significant impacts on the valuation of issuers, it can reasonably be said that SRI management currently offers investors a relatively cost-free way to benefit from the results anticipated from improved risk management and the opening of new opportunities. Choosing to invest in SRI products also involves non-monetary considerations in terms of reputation and investors’ responsibilities to future generations.