Looking for hidden ESG gems: a new frontier for responsible investing with “improvers”

By September 4, 2020 11:15

Looking for hidden ESG gems: a new frontier for responsible investing with “improvers”

The ongoing Covid-19 crisis and the resulting market turmoil have confirmed a preexisting trend within equity investing: the increasing relevance of integrating ESG criteria and sustainability into the investment decision. We believe doing so will add value both in terms of being able to deliver better risk-adjusted return, but also in terms of helping to put focus on – and ultimately improve – important ESG parameters for companies and society.

ESG equities have proved resilient throughout the crisis, both in terms of flows and performance. On flows, ESG equity funds – including active and passive worldwide openended funds – have experienced net inflows both in 2019 and so far this year, while nonESG equity funds have seen net outflows. On performance, ESG criteria have proved to be a source of outperformance both over the long term and recently.

With ESG investing becoming increasingly relevant, it will be key for active investors who look to generate excess returns to detect those opportunities where the ESG premium is not yet priced in fully. A way to do it, in our view, is moving from a static best-in-class approach to a dynamic and forward-looking one, seeking tomorrow’s ESG leaders. ESG winners are quality companies with attractive valuations and strong ESG ratings, while ESG improvers are corporates portraying a solid fundamental investment case and an improving ESG trend, but not yet an ESG leader. A combination of the two, in our view, will allow investors to benefit from the improvement in ESG ratings before a trend materialises and the premium is established. Hence, it will be important to include both ESG winners and ESG improvers in portfolios.

By September 4, 2020 11:15


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September 2020