When we enter the ESG world, we can fall into an abyss of terminology, extreme currents of thought, emerging regulation, and a lot of marketing.
However, it is something that every investor should at least be aware of and have on their horizon for many reasons.
Regarding portfolio management purposes, how can we know if this has a future? Let’s ask chatGPT-3 now that it is so fashionable. If you don’t know this chat yet, many people are already calling it the new google. Don’t hesitate and try it!
It seems clear that it is something to take into account, but at the same time, there is still no single source of data, which makes it much more entertaining for us as data analysts. Although this lack of convergence between data providers makes many people not trust it and label it as “greenwashing“.
How has 2022 been so far for the ESG factor?
Let’s focus. It is well known that when we look at the long-term factor, and the appropriate materiality matrices are used, the ESG risk factor is something that is exploitable and generates alpha for investors.
Besides, if we look for example at the S&P index and compare it to its S&P500 ESG counterpart, we could say that it is a flat year for the ESG factor, not to say that they are exactly the same. Here, I advise the reader to read the methodology used to create the index, so as not to draw conclusions based on its name alone.
If, on the other hand, we only rely on opinion articles highlighting that ESG is only a regulatory issue or that this year is the year of the energy sector, mostly labeled as anti-ESG, we might think that it has been a really bad year for the ESG factor.
Remember we are quantitative analysts
Okay, let’s stop with the opinion, and get to the evidence. Has the ESG factor been exploitable in the last year?
Well, the answer is an absolute YES, those companies with the best ESG metrics – let’s not forget that governance is one of its pillars – have outperformed those with the worst metrics.
In addition, good data providers, such as Clarity, treat each sector individually, normalizing a posteriori in order to have more comparable metrics between companies. This makes the distribution of sectors during testing unbiased.
So we can conclude that 2022 has been a good year for those who have used ESG metrics in their decision-making, adding alpha and generating conscious investment.