Qualitative vs Quantitative ESG Factor Analysis
When is the term 'ESG factor' utilised to denote a qualitative environmental, social, or governance-related concern that could potentially be integrated into the investment management process, and when does it refer to a more quantitative analysis of ESG scores, contribution to credit risk, or the addition of a true ESG factor metric to a multi-factor portfolio?
The first group of papers falls into the more quantitative category, including Axioma's recent inquiry into managing ESG score differences between data suppliers and State Street Global Advisors' methods of merging ESG into factor portfolios. The next group of papers describes the use of qualitative ESG considerations as portfolio management tools, including guidance on ESG straight from UN PRI.
QUANTITATIVE ESG ANALYSIS
Thematic Indexing, Meet Smart Beta: Merging ESG into Factor Portfolios (State Street Global Advisors, 2018)
Should ESG be incorporated as an additional factor, or used to screen the universe of potential investments? SSGA examines both approaches in an attempt to determine how best to merge ESG into factor portfolios.
For compliance reasons, this paper is NOT accessible in the United States and Canada
Can environmental, social and governance concerns (ESG) ft within a factor-based portfolio? In this article, we tackle two issues: the inconsistency in methodologies for ESG scoring, and ways to integrate ESG considerations into factor portfolios.
For compliance reasons, this paper is only accessible in the EMEA region
Franklin Templeton updates their 2018 Global Macro Shifts paper by further explaining their ESG scoring methodology and providing TGM-ESGI scores for 56 countries.
How consistent are the data sets that contain corporate ESG scores? Axioma examines four vendors, finding that while E-scores may be fairly consistent, the same is not true for the S and G components of the ESG matrix.
Hermes has developed a model that examines the ways that ESG factors influence credit spreads; then they mapped this relationship onto their own ESG-risk curve.
For compliance reasons, this paper is only accessible in certain geographies
The authors describe how ESG issues can affect a company's fundamentals and explain how analyzing ESG issues can better highlight risks and warning signals within corporations.
The World Bank and the GPIF of Japan jointly suggest that ESG factors amount to a material credit risk for investors in fixed income and that they should therefore be included in any credit risk analysis process.
The authors attempt to quantify the impact of ESG factors on the credit spread for a country's sovereign debt. They also develop a methodology for comparing countries with similar ESG profiles in the context of sovereign credit analysis.
The authors of this paper question whether ESG should be considered an equity factor at all by incorporating ESG criteria within a global market-neutral portfolio and examining the value of this decision.
How should ESG criteria affect top-down asset allocation decisions (or should it)? Fidante Partners presents an approach for integrating ESG into this process without significantly affecting return expectations or portfolio risk.
In this study, QMA proposes a novel approach to ESG investing capable of generating comparable alpha to non-ESG portfolios and ranking companies on ESG even if they don’t report sufficient data.
QUALITATIVE ESG CONSIDERATIONS
For compliance reasons, this paper is only accessible in the United States
How does ESG apply to the field of securitized assets? The PGIM Fixed Income team contends that ESG considerations, particularly social and governance-related issues, are integral to successful long-term investing in this asset class.
For compliance reasons, this paper is only accessible in the United Kingdom
In this paper, DWS reviews the practice of tilting towards high ESG rated companies, analyzing a company's carbon contribution, as well as a way to combine ESG and low carbon filters.
What are the risk and return implications of integrating ESG considerations into an investment strategy? The authors focus on the risk aspect, arguing that ESG exposures can provide information about the risk profile of individual firms, and they find clear support for this hypothesis in the data they analyze.
This is the second report in a three part series on the use of ESG factors within the practice of credit risk analysis. This report explores four issues identified in part 1 - materiality, time horizons, approaches to ESG, and communication and transparency.
This is the first report in a three part series on the use of ESG factors within the practice of credit risk analysis. The first report focuses upon what investors and credit ratings agencies are already doing in this field, as well as their expectations.