ESG Is All About Performance, Not Just Values
Our basic premise: any strategy, whether fundamentals-driven or quantitative, has an ESG component that affects performance. The ability to identify positions with hidden ESG risk leads to better performance – whatever your values.
Asset managers can use Confluence’s alpha signals to add an ESG dimension to proprietary strategies, both fundamental and quantitative. Our alpha signals reduce the risk of investing based on raw ESG scores that are not designed to provide signals about returns. Any fund or benchmark can be analyzed using our proprietary process.
Defining Our “Matrix”
Using aggregated ESG data from OWL Analytics’ broad-based, multi-sourced, unbiased dataset, we rank companies across a wide range of E, S and G criteria. Then we go much further by identifying key E, S and G characteristics that…
explain ESG-driven excess returns historically, and
identify stocks with positive forward-looking ESG-driven alpha signals.
Using these metrics, our “key performance indicators”, we then rank companies (U.S.-only; and Global ex-U.S.) according to their characteristics and build a matrix made of four distinct quadrants:
Leaders – These stocks are in the top half of their universe based on Confluence’s ESG Consensus rankings, and have a positive alpha signal. Active managers with ESG exposure mandates who want to limit ESG-related performance risk begin their analyses in this quadrant.
Prospects – These stocks are in the bottom half based on ESG rankings, but their alpha signals are positive. They may offer interesting opportunities, particularly for fundamental managers.
Concerns – These stocks are in the top half of their universe in terms of ESG consensus rankings so they may pass an ESG “screen”, but their alpha signals are negative. This is a warning sign of risk that calls for further investigation.
Laggards – Stocks in the bottom half of their universe in terms of ESG consensus rankings with negative alpha signals are “sell” or “underweight” candidates for long-only funds, while long/short funds might choose to short these names.
Confluence’s Matrix Provides Clear and Accessible Results
Returns shown are for an International Developed ETF (EAFE Index) as of 12/31/19.
The insights that come from combining Rankings and Alpha Signals are compelling: the Leaders quadrant (average return, equally weighted) outperformed all other quadrants and, in this case, delivered almost double the Laggards’ return. Each quadrant represents a “basket” of stocks for asset managers to analyze further.