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ESG screening is positively impacting portfolio performance

20 January 2019

Research by asset management group Amundi has shown that over the past four years environmental, social and governance (ESG) has been positively impacting sections of the market, with 2014 proving to be the turning point for socially responsible investing affecting stock prices. 

The research was undertaken following growing demand for ESG investing from the asset manager’s institutional clients, and looked to determine whether being an ESG investor had an impact on portfolio performance.

Amundi used data from 2010-2017 to analyse the impact of ESG investing on portfolio performance, and found that between 2010 and 2013, ESG investing tended to penalise both passive and active investors. However, it became a source of outperformance from 2014 to 2017 in both Europe and North America.

Amundi used proprietary data from 2010-2017 to analyse the performance of 1700 companies across five investment universes, corresponding to MSCI indices: MSCI North America, MSCI EMU, MSCI Europe-ex EMU, MSCI Japan and MSCI World.

By analysing the performance and ESG criteria of companies, Amundi found that the impact of ESG screening on return, volatility and drawdown is dependent on three factors: observation period, investment universe and investment strategy. Findings indicated that during the study period, the impact of ESG screening had little impact on portfolio risk (volatility and drawdown). Rather, the impact of ESG screening was crucial in terms of portfolio returns, the group said.

Across the different forms of responsible investing, the environmental factor was found to be the strongest performer for North America, while the governance factor performed the strongest in the Eurozone. The research also found that the social component improved substantially and has now been positively priced by the stock market.

Amundi said its research showed that impact on performance is being driven by increasing investor demand for ESG approaches, which in turn generates flows into best-in-class stocks, boosting stock prices and performance.

Thierry Roncalli, head of quantitative research, said: “This new scientific research confirms the time-varying dynamics of ESG performance. Since stock prices reflect supply and demand balance, our research shows that ESG screening has influenced stock market performance. It is apparent that ‘extra financial’ ESG risks have become financial risks and that asset pricing momentum is in favour of ESG investors.”

Vincent Mortier, group deputy CIO, added: “Our research confirms that ESG integration generates a tangible impact on equity performance in Europe and North America. By favouring a best-in-class ESG approach, investors are able to benefit from an investment strategy that improves long-term performance of the portfolios.”

 

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