ESG and alpha

5 responses to “ESG and alpha”

1. 

   Thomas Gillespie

   May 31, 2012

   I perceive a couple of issues with the vast bulk of ESG research:
   1) Most of the research misses the main point of ESG in that it is a risk mitigation exercise and so the chief question needs to be “Do ESG/SRI finds have a lower core/tail risk than benchmark or comparable funds?”
   2) Good ESG stocks have value and size style biases which tend to dominate. Particularly strong G stocks and to a lesser extent strong S and E stocks. Good E stocks have a significant sector bias that at least some vendors strip out when rating the stocks. These biases tend to dominate returns when trying to answer the question “How much does the ESG rating differentiate stock performance over and above the sector, value and size biases?” Happily this is not the case with the Bebchuk, Cohen & Wang paper.
   The comments of Ms Simpson from CALPERS address the perspective of most institutional investors other than those with an overarching SRI/ESG mandate – ESG should be part of good investment management, but only a part. Now it is up to the academics to show the risk impact.

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   1. 

      Andreas Hoepner

      June 4, 2012

      Hi Thomas, here tentative replies to your two questions:
      1) ESG stocks tends to have lower and tail specific risk (see the working papers of Kais Bouslah, or also Daniel Hann’s PhD or the Financial Review paper of Darren Lee)
      2) Any decent academic study should control for investment style biases. Even more so, cutting edge studies would control for investment styles at different geographical levels (e.g. if US value stocks are performing well at any point in time, this does not automatically also mean that value stocks are performing well globally).

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2. 

   Duncan Paterson

   May 28, 2012

   Mathew – happy to have a look at proposals – we’ve got an ESG service for govt bonds going back over 5 years: http://www.eiris.org/managers/ps_country_ratings.html

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3. 

   Andreas Hoepner

   May 26, 2012

   Mathew, you might want to check the development of ESG sovereign rating and conventional sovereign credit ratings over the last decade. You will probably like it … 😉 …

   Academic research in Business/Economics, unfortunately, takes 2-4 years to formally publish in peer reviewed journal and working paper platforms such as SSRN as used by academics to different degrees. So when you are expecting some research to exist but cannot find it, maybe drop an academic or the PRI Academic Network an email and there might be insights …

   [Amanda: Thanks, very nice article!]

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4. 

   Mathew McCrum

   May 25, 2012

   I am amazed that there hasnt been more research in ESG for government bonds. To me it makes more sense ESG investing in bonds that equities………….

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