Measuring the factor exposures of ESG and low-carbon investing in equities
While there is a growing consensus that applying a sustainable investment approach to an investment strategy, including environmental, social and governance (ESG) criteria and thoughtful stewardship, is desirable from an ethical, moral and fiduciary perspective, investors may also want to do so in the hopes of earning improved returns and avoiding negative outcomes.
So, it is legitimate to ask whether a sustainability-focused investment approach adds to alpha performance or detracts from it: introducing a constraint to any type of portfolio management typically limits either the opportunity set or renders management less than optimal.
We believe there are many reasons why rational investors should find it compelling to adopt a sustainable investment. For example, research has found that there is a positive relationship between ESG factors and the financial performance of companies, and that the cost of capital was lower for companies with good sustainability standards.
We have already mentioned the fit between an investor’s fiduciary duty and an ESG approach. For certain types of investors, supervisors and regulators are recommending, and increasingly asking, that ESG factors be integrated into their fiduciary duty. An ESG approach is socially desirable since it better aligns investor interests with society’s broader objectives. When managing risk, an ESG approach involves a long-term view, which is also more fitting when assessing, say, profitability.
At BNP Paribas Asset Management, we endorse all these aspects of sustainable investing as we seek long-term sustainable investment returns, built on the firm foundation of quality assets, for our clients. While we have engaged in sustainable investment for some two decades now, research into this area is fairly new and through our Sustainability Centre, we are committed to expanding the body of knowledge and establishing a firm academic basis in this field.Read more Download the article