Wavy Net

ESG Impact Investing

The current market for investments using or following ESG parameters is estimated at $20 trillion and is anticipated to grow a lot more within the next years.

ESG factors into the investment process across the board

Actionable data and advanced financial models needed.

While only 47.6% of boutique asset managers invested in ESG five years ago, today this number is 90.5% (New City)​.

Other sources cite approximately 84% of all asset managers investing according to ESG guidelines (Morgan Stanley, 2018). There are 37.000 ESG related indices out there with a 60% jump between 2017 and 2018 alone. The ESG trend is real and substantial,  but what drives it, and it is worth following this trend as an investor?

ESG is going mainstream, but along with this development, asset managers are pushing for several adjustments. 

Asset managers are demanding actionable data relating ESG to financial performance, and ESG screening on whether to include a company in a portfolio is shifting from negative to positive. Negative, for example, involves excluding oil, arms or tobacco companies without regard to their performance. 

Are returns of ESG assets higher, or their risk lower? The Dow Jones Sustainability Index, founded in 2009 and known as one of the World´s most established indices currently  with 318 components in its world version, hardly outperformed its benchmark, the Dow Jones World Index.

That is easy and generally a performance killer. First, positive screening means to include companies based on their ESG related performance. Second, this is much more difficult, because it takes data and advanced methods to explain which ESG related processes in a company are driving up returns and pushing down risk.

Third, for data to be actionable, it must be relatively standardized across companies, markets and sectors. We are far from that. While governance standards within a single market, e.g. the USA, are fairly standardized in SEC reports, this helps investors legally comply with their fiduciary duties. It does not relate the data to past or future financial performance.

ConnectESG quantifies and values ESG performance per asset and portfolio. Uniquely, it can pinpoint which specific ESG areas are contributing to depress a company´s risk and raise its returns. 

Portfolio managers can easily use our tools to overweight high performers, underweight laggards and support any shareholder actions. 

This method has proven itself  for over 10 years in indices such as the M&E LatinFinance Brazil Stars Index using a method quantifying ESG financial performance by company, outperformed the Ibovespa by between 50% and 69% over a 9 year period. The same method was using in the Asiamoney M&E HongKong Stars Index.

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