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Alternative Market Briefing

ESG factors reflect very serious changes on how dollars will be invested in the future

Friday, February 26, 2021

Dr. Patrick Welton
B. G., Opalesque Geneva:

As reported yesterday, credit rating and research company Moody's said that ESG products had seen strong returns last year and increasing demand from institutional and retail investors. Inflows into ESG products have grown upwards of 140% from 2019. According to data from Morningstar, global ESG-linked funds took in nearly $350bn last year, compared with $165bn in 2019. And sustainable funds attracted $51bn, more than twice the previous record set in 2019.

These statistics are signs of a great macro shift into an investment theme that will not go away, some believe.

Greatest single macro shift

Looking ahead, ESG (environmental, social, and governance) investment products will be the next growth frontier for asset managers, says Moody's.

Dr. Patrick Welton, co-founder and CIO of U.S. hedge fund manager Welton Investment Partners, goes one step further.

According to him, people will, someday, stop reporting on ESG as simply interesting factors that might have arisen out of public policy concerns, regulation, or interest from impact investors.

"We believe that ESG factors are the greatest single macro shift that will occur in the 2020s," he tells Opalesque. "If one were to stop using the acronym ESG and just substitute that with 'future consumer preference' factors, 'massive demographic changes in demand' factors, these kinds of things would change the argument.

"It is our job to change the argument, and we believe that is happening already. People recognise that there will be a new way to frame the reporting on it, that it is in fact a very large macro way of investment theme that is coming in the next decade. It may have arisen from a narrow corner of interest but the factors themselves reflect very serious changes on how dollars will be spent, invested, what will be produced, and how it will be produced. Therefore, this is an investment theme that does not go away."

Source of alpha

In June 2020, Welton launched its own quantitative program, Welton ESG Advantage, which was up over 19% that year according to a reliable database and is positive YTD.

Welton developed an ESG strategy that not only takes advantage of the beneficial pro-cyclical equity risks in many ESG strategies but also provides the potential for downside protection during market turns.

"The interesting dynamic of the work we have done over the past six months has been much more data analysis with various ESG data providers. We have been able to improve our process by thinking not only of ESG data as ratings and screens but also of certain types of materiality-exclusion screens with respect to fossil fuels, tobacco, weapons."

"Also, being a quant manager, we have been looking at momentum factors in ESG scores and whether they could be a good sign not only of a company improving its overall value proposition but also as an indicator of future asset flows into those companies with improving rating momentum, thus providing a potential source of alpha in the portfolio."

Related articles:

09.Jun.2020 Opalesque Exclusive: Quants make the case how to move ESG beyond long-only equities: White Paper

28.May.2020 Opalesque Exclusive: Welton set to launch ESG quant strategy

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