Can ESG be a Source of Alpha?

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Stockholm (NordSIP) – At Skytop Strategies’ ESG Integration Summit last week, one of the panels focused on the concept of ESG as a source of Alpha, a subject attracting more and more interest.

In the panel, three professionals representing very different organisations gave their perspectives on how ESG can be used to create outperformance. They all had in common a firm belief in the possibility of value creation through ESG.

According to Akbar Ali, Portfolio Strategist at State Street, managers today say: ”Give me the highest possible return”. In the future they will likely say: ”Give me market return with the highest possible ESG value”.  ”State Street’s only focus is to create excess return through quantitative ESG processing”, said Akbar Ali. He emphasized that the companies that pick the right ESG matrix have greater chances of becoming successful. Different ratios are important in different industries and companies. State Street’s mission is to beat the index, and this guides the choice of ESG-signals. The company has begun to integrate two years of data tied to ESG in its quantitative analysis, and Akbar expressed great confidence in the potential impact on performance that they expect to come out of this.

Maria Mähl, Head of Nordics at Arabesque, pointed out that more companies demanding data makes data increasingly better and markets are getting increasingly better at measuring externalities, e.g. carbon emissions. In Maria Mähl’s view. it all really boils down to risk analysis. Look for operational excellence. Which companies have solutions? Which companies are ready for change?

Out of the needs from their internal investment management business, Arabesque developed its own data product in order to find unique data and create a predictive matrix. Focus is on adding value but also on trying to avoid crashes among portfolio companies.

Whereas State Street and Arabeque have a quantitative perspective, the third member of the panel, Carl Cederschiöld, CEO of Handelsbanken Fonder, belongs to a traditional house. His way of using ESG is therefore somewhat different. According to Carl, ESG helps in the traditional financial analysis; e.g. to find which companies will be winners and losers on the Paris agreement. To be successful going forward, ESG must be used to choose portfolio companies. Next step in ESG will be ”to understand the output of the companies and match winners and losers to ESG principles”.  At Handelsbanken Fonder the portfolio managers first try to remove the worst companies/losers on climate change and then try to find the winners. For a fundamental house it is important to not to get lost in the flow of data. The firm uses Planetary wealth and Financial wealth as key value words to focus on, as they must work in tandem. ”It is important to keep the major issues in mind” says Carl Cederschiöld.

 

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