Are investors missing opportunities in ESG?

Investors can benefit from ESG added value in different ways, with various financial performance outcomes.

There are several approaches to take into account sustainability challenges in the investment process, for instance:

• Considering ESG (Environmental, Social, Governance) practices of companies to protect and enhance the value of a portfolio over the long term.

It mainly relies on exclusions (removing exposure to controversial sectors such as tobacco, gambling or coal) combined with a best-in-class selection process (selecting instruments with the best sustainability ratings).

• Investing in specific sustainability-oriented themes

On the top of the selection process described above, thematic investments focus on sectors related to sustainability challenges such as water management or circular economy.

A brief review of ESG performances

Investors have observed different patterns of performance according to the strategy, as illustrated by the examples below.

Indexes with ESG factors

One of the most widespread approaches is to include ESG filters in stock market indices via exclusions and a positive screening (best-in-class selection process). In the chart below, we notice a stronger performance in the ESG version of the S&P 500 index compared to the traditional one over the past 5 years.

The ESG process slightly changes the composition of the resulting index compared to its parent’s, but sectors’ weights remain very close. Applying ESG filters tends to create a natural tilt towards companies of a generally higher Quality profile, explaining part of the observed stronger performance.

The same observation applies to the MSCI World compared to its ESG leaders or SRI version.

Thematic investments

An investor can also express his convictions via thematic investments in fields such as water or clean energy infrastructures. Various trends have been observed, with heterogeneous performance and higher volatility, as for any other thematic bet, sustainability-related or not.

Are these findings supported by research?

These examples illustrate common results summarized by our CIO Strategy from academic research. To quote a few:

• ESG is often associated with corporate quality factors.
• Losses are typically less important under adverse scenarios for equity indices integrating ESG factors.
• Because they have to identify solution providing companies, thematic strategies show a higher volatility due to their growth orientation.

Investing with confidence in such topics requires the joint expertise of financial and sustainability specialists to deliver solid investment proposals relying on a holistic analysis of financial instruments.

This article is brought to you by the Sustainable Solutions Team. 
Contributors: Jérôme Eschbach - Head of Sustainable Solutions, Maxandre Robin - Sustainable Solutions Analyst, Paul De La Baume - Investment Advisor