The connection between a company’s ESG (environmental, social, governance) characteristics and its market performance has been heavily researched. To date, most studies confirm that companies that rate low on ESG factors are more prone to large, company-specific drawdowns. Conversely, company management that focuses on mitigating ESG issues – carbon emissions, workplace safety, and board independence – may better avoid headline risks that can lead to sharp price declines. This makes ESG screening a useful risk management tool for advisors.

New research from MSCI shows a positive connection between ESG trajectory and a company’s excess returns. Trajectory focuses on how a company’s ESG rating evolves. Referred to as “ESG Momentum,” MSCI examined the year-over-year change in companies’ ESG ratings relative to their sector within the MSCI World Index. Top quintile companies (with the largest increase in ESG score) outperformed the bottom quintile by nearly 1% annualized from June 2009 to February 2018. That outperformance widened to 2.8% annualized for the MSCI Emerging Markets Index over the June 2013 to February 2018 period.

For equity investors looking for alpha, this suggests that ESG trajectory can be an important factor for evaluating active managers. Simply buying a highly rated company won’t necessarily help with outperformance. It’s better to buy companies on an upward trajectory relative to their peers and actively monitor and adjust those positions accordingly.

The chart below shows that the average US equity fund holds 15% in positive trending ESG scores. Screening for funds with above-average momentum eliminates 55% of the US equity category, providing a much more manageable starting point for due diligence. In the final stages, practitioners might consider minimizing allocation to funds with above-average exposure to negative trending companies to get the best of both worlds. The same process can be applied to international and emerging market equity funds.

Refinitiv™ Lipper® Category # of Funds % of Holdings with “Positive Trend” % of Holdings with “Negative Trend” # of Funds with above average “Positive Trend” % of Funds Eliminated
Equity US 2712 15% 5% 1220 55%
Equity Global ex US 723 12% 5% 301 58%
Equity Emerging Mkts Global 893 10% 7% 426 52%
“Positive Trend” is the percentage of portfolio's market value with a positive ESG rating trend (upgrade) in the year prior to the most recent ESG rating. “Negative Trend” is the percentage of portfolio's market value with a negative ESG rating trend (downgrade) in the year prior to the most recent ESG rating.
Source: MSCI, Refinitiv Lipper, Natixis Portfolio Clarity®. Data as of 8/31/2019.

For assistance in building an ESG model, please reach out to your Natixis Investment Managers sales representative or call 800-862-4863.
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Investing involves risk, including the risk of loss. Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor's overall performance depending on whether such investments are in or out of favor.