Traditional alpha opportunities tend to be found in underappreciated areas of the market where an expected improvement in fundamentals will lead to a re-rating of the stock. The same can be said for ESG investing: companies that embrace and improve their ESG profile will be rewarded by the market.
ESG Improvers: the road to responsible alpha
As ESG investing is increasingly relevant, it will be key for investors to be ahead of the curve. Being positioned in companies where ESG profiles are improving gives the opportunity to capture the ESG premium not yet fully priced in. Anticipating improving ESG dynamics and then reaping the potential rewards is what Amundi offers. The ESG Improvers approach seeks to deliver alpha to clients by investing in companies that have already embraced, or have committed to improve their ESG footprint.
A dynamic, forward-looking approach seeking tomorrow’s ESG winners
Historically, responsible investing has been based on – and driven by – pure assessment of ESG ratings, which tend to focus on what companies have already done. When moving from a snapshot in time (ESG rating) to a forward-looking approach, investors can evaluate the impact and the materiality of the ESG commitments of a company and the result will be greater analysis, deeper understanding of the fundamental drivers, and potentially improved performance. To unlock value from ESG improvement, a dynamic and forward-looking perspective is needed, through the following steps:
- Identifying the ESG drivers that are material to a corporate’s ESG profile. For instance, the CO2 footprint is more relevant to an energy company than to a telecommunication company.
- Identifying the financial impact of those drivers. To capitalise on this, a combination of both ESG and financial analysis is critical.
- Understanding how these drivers changed in the past, and assess how they will change in the future.
Portfolio construction: ESG winners and/or ESG improvers?
The ESG improvers philosophy blends ESG winners (quality companies with attractive valuations and strong ESG ratings) with ESG improvers (corporates portraying a solid fundamental investment case and an improving ESG trend). Choosing ESG Improvers allows investors to benefit from the improvement in ESG ratings before a trend materialises and capture the potential premium. ESG winners act as a sound quality foundation, while the improvers offer an additional source of potential growth and return. Hence, it will be important to include both ESG winners and ESG improvers in portfolios to achieve optimal risk-adjusted returns.
5 guiding principles for dynamic ESG investing
- Buy low, sell high: extending the common investment philosophy to ESG will get rewarded by the market
- Best in class: seeking ESG improvers through an all-inclusive approach across all sectors
- Fundamental approach: go beyond static ESG ratings to include forward-looking qualitative assessment
- Materiality: ESG improvement must be tangible and relevant, focusing on financially relevant factors
- Improvers and winners: the potential return of ESG improvers, combined with the quality of ESG winners, can enhance the risk-adjusted return profile
Disclaimer: This document is not intended for citizens or residents of the United States of America or to any «U.S. Person» , as this term is defined in SEC Regulation S under the U.S. Securities Act of 1933. Amundi accepts no liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this material. Amundi can in no way be held responsible for any decision or investment made on the basis of information contained in this material. The information contained in this document shall not be copied, reproduced, modified, translated or distributed without the prior written approval of Amundi, to any third person or entity in any country or jurisdiction which would subject Amundi or any of “the Funds”, to any registration requirements within these jurisdictions or where it might be considered as unlawful. Accordingly, this material is for distribution solely in jurisdictions where permitted and to persons who may receive it without breaching applicable legal or regulatory requirements. The information contained in this document is deemed accurate as at 31 October 2020. Data, opinions and estimates may be changed without notice. Document issued by Amundi Asset Management, a French “société par actions simplifiée”- SAS with capital of 1 086 262 605 euros - Portfolio Management Company approved by the AMF under number GP 04000036 – Registered office: 90 boulevard Pasteur – 75015 Paris – France – 437 574 452 RCS Paris – www.amundi.com
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