ESG alpha solution
in a labyrinth

2 responses to “ESG alpha solution
in a labyrinth”

1. 

   Gerrit Heyns

   May 18, 2012

   sorry, failed methodology

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2. 

   Gerrit Heyns

   May 18, 2012

   Frankly, this is just another fix to a fialed methodology.

   Of course we are all trying to ultimately add alpha, but we will never succeed if we continue to use failed methods. The market is a price determination mechanism based on perceived current and future value. Alpha is achieved by owning companies that collective have greater value over a period that the general market.

   Subjectively ranking of companies against subjectively created environmental, social or governance metrics does not stimulate market price behavior. In fact, the market largely ignores it and has done since we came up with the ESG acronym in the first place. Yet we keep trying different permutations of the same wonky process hoping that it’s the market that’s wrong and not our process.

   With all due respect, Mr. Mills suggests that we empower an already empowered underlying manager by providing him with a really good secret; more information; information that is not meant to change his thinking, but to stimulate a deeper thought process. Are you kidding me? Are we managers so thick that we need to outsource to think deeply enough about what we are doing?

   And what’s in this new secret sauce. It is more, literally, subjectively selected ranking data, hugging an acronym from a consortium of information providers, with the added benefit of another subjective rating by an engagement agent.

   Surely, it makes more sense to bin the failed methods and think a bit more objectively. Find hard data in companies that have verifiably implemented processes which lead to a better utilization of environmental inputs. Those companies tend to have better environmental track records.

   Identify companies that themselves set standards, measure and manage their social and environmental responsibilities. Those companies tend to exhibit the characteristics of good corporate governance.

   What you may find, to your surprise, is that a portfolio of these kind of companies also produces alpha, and in good measure.

   The reason that managers don’t do this is because it is hard. So we outsource subjective ESG information gatherers to appease our consciences and our handlers, think very deeply about the impact of important things, and ultimately disregard them because they doesn’t add price moving value.

   The alpha is not in the acronym. The old methods are broke and need fixing, not patching.

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