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ESG exclusion filter improves performance, study finds

Green_investmentsImplementing environmental, social and governance (ESG) criteria can improve the performance of both active and passive risk-factor portfolios, according to research by an asset manager.

A policy of exclusion based on companies’ ESG scores did not impact portfolio performance negatively, according to analysis of a universe of stocks drawn from the MSCI All Country World index between 2007 to 2018.

In most cases, Paris-based Lyxor Asset Management found that using an ESG filter improved the performance, even on a risk-adjusted basis.

“Improving the ESG profile of a portfolio does not happen at the expense of performance. In some cases, it can even lead to superior returns”, said Marlène Hassine Konqui, head of ETF research at the firm.

Excluding 50% of companies with the lowest ESG ratings from a European equity size portfolio added 2.3% per year of return over ten years, while removing 1.6% of volatility.

Sustainable investment assets, including both actively and passively managed ESG funds, reached more than $31 trillion (€28.2 trillion) at the end of 2018. ESG now represents nearly a 40% share of global professionally managed assets.

“As the availability and reliability of ESG information improves, more and more index-based strategies are being created to embed ESG characteristics,” Konqui said.

The bulk of ESG assets are still actively managed, but there’s evidence of a shift to index funds amongst ESG investors, according to Lyxor. In Europe, passive ESG fund assets have grown at a rate of 35% per year over the past five years, compared with 11% for actively managed ESG funds.

Another recent study by NN Investment Partners found that ESG investors tended to focus less on returns from social and governance investing than they do on environmental opportunities.

Only 15% of professional investors saw the return potential in social factors and 40% in governance. This compared to 66% for environmental factors.

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