Asset Management’s Biggest Trend: ESG Integration
The esteemed Business Roundtable recently underscored the key role of ESG by redefining a corporation’s purpose to include serving all stakeholders because “it is the only way to be successful over the long term.” Hence, it is accepted that ESG factors impact every business, thereby affecting every investor and investment strategy. But what does that mean, in practical terms?
ESG data offerings are expanding, but until now, there has been no clear way to use that data to improve investment decisions. Confluence Analytics shows how to make better decisions that reduce risk and boost returns, whatever your investment strategy.
Transforming ESG Data into Actionable Insights
Confluence starts by recognizing that in any given equity universe, benchmark or fund, every stock is either in the top or bottom half of rankings based on a chosen ESG score or metric. But, ESG rankings alone are not designed to be performance-related.
So, we next combine ESG rankings with a proprietary ESG-based alpha signal (forward-looking excess return, adjusted for market and sector) that is easy to interpret – either positive or negative – for every stock. Our alpha signal, stand-alone or combined with any other metric, can steer investors away from risky positions that harm performance.
The combination of ESG Rankings and a forward-looking alpha signal creates a proprietary matrix (see below) that provides a clear basis for helping investors avoid hidden risks.
Each stock in the universe/fund/benchmark is in either the top- or bottom 50% in terms of its ESG ranking.
Each stock has either a positive or negative forward-looking alpha signal (excess return adjusted for market and sector effects).
Each quadrant is the intersection of stocks in the top/bottom half of ESG rankings that have a positive/negative alpha signal.
Most Investors Miss ESG-Related Performance Risk
Takeaway: The trend is clear. ESG is becoming the third exposure mandate, along with style and risk. Adding our alpha signal to ESG scores or rankings creates a framework for decision-making that provides much more information than one-dimensional rankings. Confluence’s Alpha Signals represent a powerful opportunity for those who have the tools and know how to use them.