ESG outperformance depends on manager quality
There is no straight answer as to whether an environmental, social, or governance (ESG) fund performs better but a lot of the performance comes from the quality of the manager and style bias, according to AMP Capital.
Speaking on a webinar, AMP Capital portfolio manager – multi asset group, Kristen Le Mesurier said she agreed with the Responsible Investment Association Australasia (RIAA) that said ESG did not mean sacrificing returns and could add value, but that it came down to skill.
“It’s a managers skill in identifying an ESG issue ahead of time, understanding they impact on earnings and share prices, and making stock selection decisions accordingly. That is where there’s value in ESG,” she said.
Le Mesurier said that if a manager used a score from an external provider who did not consider earnings impact and making a call on that it was unlikely incorporating ESG factors would have an impact, and could even have a detrimental impact.
“It comes down to the quality of the manager at taking ESG issues, thinking about them in earnings context,” she said.
She noted that external data also did not capture style biases in an ESG fund.
For example, she said, excluding the energy and resources sector due to a lack of environmental impact management and therefor a view that it would negatively impact earnings would tilt the portfolio relative to a benchmark and be underweight those sectors.
If a fund was underweight financials due to reputation risk, it would likely be overweight healthcare and potentially technology and this was the inherent style bias.
“Over the last few years in ESG funds globally, those biases have worked really well,” Le Mesurier said.
“If you have a good manager that takes ESG issues and tilt the portfolio accordingly and you have style biases that works really well like technology and healthcare as they have been going gang busters and underweight the energy and financial sectors at a time when they have struggled for a range of reasons – you can see how that performs relative to a benchmark and all factors have an influence.
“It’s not easy to say if you outperform with ESG or not. It’s more complicated than that.”
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