Environmental, social and governance (ESG) factors are increasingly important benchmarks used by investors in their decision-making. The idea is simple: companies which account for environment factors are in tune with the society in which they operate and promote models of good governance most likely to ensure their survival and consequently deliver the best long-term returns.
The importance of non-financial information has grown dramatically for both companies and investors over the last two decades. Today, a large majority of investors and corporations would not argue anymore with the assumption that environmental, social and governance (ESG) measures are important for both long-term value and holistic risk assessment. Even more so, corporate leaders and large investors increasingly call for the firm to reclaim its public purpose, assuming a wider responsibility towards environment and society.
Getting the sector right is a key determinant of portfolio returns. Along with regional allocation, it comes right after asset allocation and before security selection in a top-down process. There have been multiple studies in recent years showing that – alongside momentum – seasonality and earnings revisions indeed add value in sector allocation. We covered this some time ago1 by comparing individual factors such as momentum, fund flows and value, presenting a coherent framework on how to combine these elements in our Global Equity Sector Scorecard. We now expand on these considerations, examining common drivers of sector returns, and we highlight new approaches to sector allocation that can improve risk-adjusted returns.
It’s been around for just 15 years, but responsible investing has already become a megatrend that’s getting increasingly tough to ignore. It was only in 2005 that the United Nations established the Principles for Responsible Investing (PRI), but already investors with more than EUR 80 trillion in assets have made their commitments to the PRI. Investment banks and asset managers have a key role to play in engaging with corporations, which have also had to focus more on ethical behaviour due to active voting at general meetings by activist investors.
Socially responsible investments have become increasingly popular in recent years. Appetite has grown significantly among institutional investors, in particular church organisations, foundations, as well as pension and sovereign wealth funds such as the Government Pension Fund Global of Norway.