Steps remain to fully integrate ESG
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • A pharmacist administers a dose of the COVID-19 vaccine in Mountain Brook, Ala., on Feb. 21, 2021
      Business optimism grows as vaccinations spread – Fed
      watch video
      0:59
      Coronavirus and the S&P 500: February 2021
      Multiemployer pension measures cleared for relief bill vote
      The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
    • OECD proposes revision of its DC ‘good design’ roadmap
      Dominic Scriven, director and portfolio manger of Dragon Capital, speaks during an interview in Ho Chi Minh City, Vietnam in 2006
      Vietnam gets its first private defined contribution plan
      DCALTA releases daily valuation tool for alts in DC plans
      PSCA: Employee participation in non-qualified deferred comp plans rising
    • Michael Herskovich
      BNP Paribas Asset Management names global head of stewardship
      TPT Retirement taps into low-carbon strategies
      Gary Gensler
      Nominee Gensler backs SEC climate risk disclosure
      Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
    • 2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
      Spirit winners
      Prudential honors young people who are helping out
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Scorecards help investors track S&P 500 efforts on racial justice, workplace equity
      Irshaad Ahmad
      Canada Post delivers new pension fund CIO
      Former regulators ask Congress to address market stability
      The Securities and Exchange Commission seal is displayed outside headquarters in Washington
      SEC launches climate task force
    • Railpen hires head trader in preparation for in-house trading
      Andy Moniz
      Acadian picks responsible investing director
      Schroders PLC office building on Gresham Street in London's financial district
      Schroders AUM gains as private assets and alternatives unit grows
      Amanda Agati
      PNC chooses new CIO for asset management group
    • Irshaad Ahmad
      Canada Post delivers new pension fund CIO
      Los Angeles Fire & Police eyes up to $950 million in private equity commitments
      Sempra Energy to infuse pension plans with $246 million
      Illinois pension fund liability jumps 19%
    • Irshaad Ahmad
      Canada Post delivers new pension fund CIO
      Railpen hires head trader in preparation for in-house trading
      Deborah Shufrin
      Colby College chooses new CIO
      Andy Moniz
      Acadian picks responsible investing director
    • The Charging Bull statue is covered in snow near the New York Stock Exchange on Feb. 11, 2021
      Bain: Private equity managers finish 2020 strong
      Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
    • AEW chooses head of fund operations and debt finance
      Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • CalSTRS allocates $5.7 billion in second half of 2020
      Oklahoma Teachers assigns $160 million to Franklin Park
      Fairfax County Educational Employees discloses $61 million in commitments
      Bristol, Conn., scouting for investment consultant
    • CalSTRS allocates $5.7 billion in second half of 2020
      Oklahoma Teachers assigns $160 million to Franklin Park
      Fairfax County Educational Employees discloses $61 million in commitments
      Bristol, Conn., scouting for investment consultant
    • Independent Investment Consulting Services
      Financial Auditing Services
      Actuarial Services
      Emerging Market Equity Manager Services
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Investment Trends: Looking Ahead Across Equity Sectors
      Rethinking Market and Reference Data Management
      China is embarking on a new stage of growth
      Gold Outlook 2021
    • Sameer Shalaby
      Commentary: Why should investors care about treasury management?
      David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Leveraged Net Long (SA Only), 4th Quarter 2020
      Top Performing Managers of Market Neutral (SA Only), 4th Quarter 2020
      Top Performing Managers of U.S. Stock, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
January 25, 2017 12:00 AM

Steps remain to fully integrate ESG

Rodrigo Tavares and Daniela Barone Soares
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Rodrigo Tavares and Daniela Barone Soares

    All investors seek the same thing: superior risk-adjusted returns. And in recent years, the integration of environmental, social and governance information into investment decision-making and portfolio construction has become a viable route to achieving that goal. Through ESG, we see things more clearly without having to give up anything.

    However, several investors are demanding more quantitative studies on the link between ESG and risk. Is there a difference in the average of the standard deviation of stock prices of companies with good ESG ratings vis-a-vis stocks with bad ESG performance? Is it possible to quantitatively demonstrate this difference, and establish that ESG firms bear less risk compared to non-ESG stocks? And, critically, since lower risk has traditionally meant lower financial returns, how can ESG investment really be a viable investment strategy?

    A new study conducted by Granito & Partners in collaboration with Madrid's IE Business School has shed light on this issue. Just published by the Journal of Sustainable Finance & Investment and available on Granito's website, the study relied on the Dow Jones Sustainability index, one of the oldest and most recognized indexes in the field of ESG, to identify 157 companies that have good ESG performance. To contrast, and in order to bring statistical significance to the results, it randomly selected a greater number of companies — 809 — that are not listed on the DJSI. As the materiality of the ESG factors is highly related to the industry in which the firm operates, the study grouped equity stocks into 12 industries. The authors of the study are N.C. Ashwin Kumar, Camille Smith, Leila Badis, Nan Wang, Paz Ambrosy and Rodrigo Tavares.

    Huge difference

    The results are striking. In all 12 industries studied, the group of ESG companies listed in the DJSI, shows lower stock return volatility in comparison to the reference companies — on average by 28.67 percentage points less. But risk varies according to industry, with a stronger impact in materials, banking, energy and technology. The difference ranges from 6.1 percentage points (for food and beverage) to as much as 50.75 percentage points (the energy industry). This difference of percentage is a risk premium that the reference or non-ESG companies face and that investors should take into consideration when making investment decisions. (Risk was calculated using Sharpe and Treynor ratios.)

    In contrast to conventional thinking in which lower risk means lower return, the model shows that even with a lower risk, the investment could achieve a higher equity return. The majority of the industries that were studied (eight of the 12) resulted in better returns for ESG companies than their peers — ranging from 2.25 percentage points to 31.84 percentage points higher. Across all 12 industries, the positive effect on equity return is 6.12 percentage points higher for ESG companies on average. And, if one looks at only the eight industries with clearly higher ESG returns, this difference jumps to an average 14.08 percentage points for ESG companies compared with their peers. The industries of energy, food and beverage, and health care show the highest advantage regarding the positive impact of good ESG practices on the stock return (lower risk and higher return). It becomes clear, therefore, that ESG factors give investors a more complete picture of business opportunities, reducing risk and improving alpha.

    More support

    The Journal of Sustainable Finance & Investment study, which is focused primarily on the correlation between risk and ESG, complements an array of other studies centered primarily on the correlation between returns and ESG. These were published in recent years by the Harvard Business School, Cambridge Associates and the Global Impact Investing Network, Allianz Global Investors and many others. All demonstrate that integration of ESG factors brings higher returns. Given the fact that a recent survey by RBC Global Asset Management showed many investors remain uncertain about the ability of ESG investing to drive investment performance and mitigate risk, studies like these will help clear the path.

    Mainstreaming ESG

    In a few years, ESG integration will likely become a routine asset management practice. But a few steps still need to be taken.



    • Fiduciary duties. Despite recent recognition by the U.S. Department of Labor and The Pensions Regulator in the U.K. that ESG is a proper component of the fiduciary's analysis, more regulatory and policy work needs to be done to establish a common, global agreement on the necessity of including ESG in fiduciary duties, as stated in a report by the United Nations-supported Principles for Responsible Investment.

    • Investment strategies. ESG is a good fit for some asset classes and investment types (public and private equities, fixed income), but we need more of a track record for others (hedge funds, venture capital, commodities). According to a 2016 survey by Unigestion SA, 53% of hedge fund managers showed no interest in ESG. Microsoft has recently taken an important step supporting an ESG venture capital fund in Brazil, one of the first in the world, but Silicon Valley is still detached from ESG issues.

    • Investment horizons. There is a potential mismatch between long-term investing associated with ESG and short-term investment strategies. Although institutional investors prefer the first, ESG should become relevant also for the latter in order to cover the full spectrum of investment time frames.

    • Data. Investors and financial analysts need more training and better instruments to extract ESG data from assets. Qualitative assessment of integrated reports along with quantitative data by service providers such as MSCI, FTSE4Good or DJSI are very useful, but ESG — just as fundamental analysis — needs to be able to develop machine learning and artificial intelligence tools to ensure more sophistication and precision.

    • Alphabet soup. Just as in any other emerging field, we have been too prone to create terms to coin specific phenomena or practices. Presently, there is no terminological consensus between “ESG investing,” “socially responsible investing,” “sustainable investing,” “impact investing” and so on. Different players demarcate borders differently. Lack of universality hinders mainstreaming.

    • Standardization. Just like professional accounting standards, companies should be able to communicate their ESG performance in a standardized and universally accepted fashion. The Sustainability Accounting Standards Board is a step in the right direction, but the mission is not yet accomplished.

    • Managers. The staggering growth of ESG investing has outpaced the training of managers on ESG-related issues. In 2016, 37% of institutional investors incorporated ESG factors into their investment decisions (up from 29% in 2015), according to a Callan Associates survey. There is, therefore, a need to have more money managers that have an ESG sound analytical knowledge with processes in place. For a few months now, the CFA Institute has been giving ESG expanded weight in its exam, but a lot more emphasis should quickly be put globally on training.

    • Universalization. The rhythm of ESG growth varies according to regions. ESG investing represented $8.72 trillion, or one-fifth of all investments under professional management in the U.S. this year, an increase of 33% since 2014, according to the US SIF 2016 report. Europe is equally high. But figures are much lower in Asia, Africa and Latin America.

    Adding ESG to fundamental analysis is akin to presenting magnetic resonance imaging to medical practitioners used to X-rays. It is likely a game-changer in the way we operate in capital markets. But we have to be careful and creative in order to capture its full potential. The years ahead will be decisive.

    Rodrigo Tavares is founder and CEO of Granito & Partners. Daniela Barone Soares is a partner at Granito & Partners. They are based in London and Sao Paulo, respectively. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I’s editorial team.

    Related Articles
    GPIF plans further boost to investment team
    New administration's environmental policies unlikely to undermine investor ESG …
    FRR taps 3 managers to use ESG factors on equity allocation
    ERAFP hires 5 firms to analyze climate change risks on its portfolio
    Standard Life Investments recruits governance and stewardship director
    Pacing models are useful, but have limitations
    Paying the price in a net-long portfolio
    London Stock Exchange develops guidelines for ESG reporting
    L.A. Clipper star Chris Paul the latest to partner with Turner Impact Capital
    As impact investing grows, it moves toward defining moment
    ESG not going away, but a lot of work left — CII conference panel
    Private equity: a state of constant renewal
    Crisis alpha everywhere
    Asset owners discuss challenges in public market impact investing at conference
    Impact investing assets expected to rise 17% this year — report
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    How will gold react?
    Sponsored Content: How will gold react?
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Rethinking Market and Reference Data Management
    Investment Trends: Looking Ahead Across Equity Sectors
    China is embarking on a new stage of growth
    Gold Outlook 2021
    Shifting DC Times - Winter 2021
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center