How Quants Achieve Material Improvements in ESG Investment Performance
Thursday, June 18th, 10:00 am EST
ESG funds provide an important means for investors to align their portfolios with their values. However, the average ESG investor has underperformed the market - sometimes by a meaningful margin - while shouldering the same systemic risks borne by equity investors. Idiosyncratic risk mitigation is simply overpowered by systemic market risk during crises and corrections alike. This is exacerbated by the fact that ESG fund assets are almost entirely concentrated within long only equity funds as opposed to Fixed Income or Balanced funds.
Moreover, equity-only ESG funds may not provide the returns investors require going forward, especially post-COVID-19. For example, on average public pension plans have a 50% allocation to global equities, and a 7.2% investment plan return assumption. Given diminishing forward equity return expectations, it is likely that long-only ESG equity portfolios will not solve this problem alone.
While the first iterations of ESG investing are based on relatively simple data analysis and scoring, investors can now benefit from the next round of innovations that highly specialized quantitative investment experts are offering investors to achieve material improvements in ESG investment performance.
Welton Investment Partners is an established manager that applies a scientific approach to quantitative investing, offering solutions that are uncorrelated to traditional equity and credit-based investments. Welton has applied this quantitative approach to the development of a new holistic ESG strategy that suppresses market risk and expands beyond market-only returns.
This Opalesque SKILLSLAB webinar will cover:
- Brief review of long-term performance of ESG funds: Near-market returns and unmitigated market risk may not represent the apex of achievable ESG performance
- How a new quantitative approach to ESG strategy can guard against the key risk of acute economic contraction by mitigating downside risk.
- Three ways this quantitative approach can improve an ESG portfolio’s risk/return profile:
1. Integration of timely and broad ESG datasets
This allows for the manager to combine big data and ESG metrics to assess the performance and sustainability of companies worldwide
2. Dynamic stock selection and weighting using machine learning techniques
Alternative techniques taking risk exposures into account have the potential to better manage portfolio volatility.
3. Integration of orthogonal strategies to mitigate market risk and enhance performance
The addition of a diversifying trend strategy to the mix has the potential to elevate investor experience away from market risk, and beyond market-only performance.