ABSTRACT This research is an update of the study that we published last year (Bennani et al., 2018) and that explored the impact of ESG investing on asset pricing in the stock market. It extends the original period 2010-2017 by adding eighteen months from January 2018 to June 2019. These new results confirm the previous results as we reach the same essential conclusions once again. ESG investing tended to penalize both passive and active ESG investors between 2010 and 2013. Contrastingly, ESG investing was a source of outperformance from 2014 to 2019 in Europe and North America. Moreover, ESG can be considered as a risk factor in the Eurozone, while it continues to be an alpha strategy in North America. However, the last 18 months exhibit new interesting patterns. First, we observe a transatlantic divide since the results for North America and the Eurozone are different for the recent period. Second, we document a partial ordering between ESG ratings and performance that can be explained by a shift from a static to a dynamic approach to ESG investing. Third, we note some discrepancies between active and passive management. Fourth, the social pillar seems to have gained traction these last years, and is no longer the laggard pillar. Fifth, factor investing and ESG investing are more and more connected. In what follows, we develop and explain these five key findings. |
Read the study on the impact of ESG Investing on Fixed Income Portfolios
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KEY FINDINGSUsing the same methods as for our previous research, we study the period from January 2018 to June 2019 and find some interesting new patterns compared to the 2014-2017 period. Some were predictable, but others are definitely more surprising. |
Responsible Investing & Performance: Results from our 2018 Study
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The Transatlantic divide. After eight years of similar development, we observe a contradictory trend in ESG investing between North America and the Eurozone since 2018. In North America, we notice a decrease in alpha generation on all dimensions, and even a loss on the Environmental pillar, whereas in the Eurozone, the same positive dynamic still operates, with the E and the S pillars over-performing. We do see a slowdown on the G pillar, but this is natural given it was the most dynamic of the three pillars over the last period. |
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Moving from static to dynamic. We observe a new development in ESG integration, with a surprising finding for some pillars. The second-to-last quintile of our sorted portfolios (having ESG scores in the fourth quintile) performs surprisingly well, meaning that there is more to the story than a linear approach to ESG investing. We interpret this as a shift towards forward-looking strategies, with investors betting on improving companies as well as well-scored companies. This means that ESG investors have gone beyond worstin-class exclusion or best-in-class selection policies and have implemented more active strategies by integrating a dynamic view of ESG scores. |
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Passive strategies: various approaches, various challenges. Traditional exclusion-based passive ESG strategies continue to outperform. For tilted and optimized portfolios, the study exhibits discrepancies with an overall excess return reduction. Nevertheless, portfolios showing a TE budget below 50 bps – which is the most commonly accepted risk budget by institutional investors - continue to show positive results. |
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Social: from laggard to leader. From 2014 to 2017, we noticed that the S pillar was clearly the lagging pillar, with delayed results. This is no longer the case: we observe very strong performance both on the active and passive side for 2018-2019, most likely as a result of growing investor concern for social themes such as rising inequalities. |
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All quiet on the factor front. Finally, our factor analysis remains unchanged for this period: ESG remains an alpha strategy in North America, whereas in the Eurozone, it is the best explaining single-factor of stock returns. This means that even if the ESG contains some information in North America, it offers little diversification benefits in multi-factor framework, whereas it improves the diversification in a portfolio that is already welldiversified in the Eurozone. |
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