ESG turns the corner – it actually makes money

Vontobel Asset Management, the big Swiss-based multi-strategy manager, which has been managing money on a sustainable basis since 1994, believes the corner has finally been turned. Investors – at least the professionals – now know that ESG management enhances returns.

Zurich-based Roger Merz, Vontobel managing director and head of portfolio management, said on a recent visit to Australia, where the firm has several big client funds, that within the next five-to-ten years, it will be normal for all managers to include ESG factors in their processes.

In the meantime, his firm and a few others, such as Australia’s Remerga Asset Management (see separate report this edition), have a comparative advantage.

For Vontobel, Australia represents its largest client base outside of Europe for its emerging markets strategies. Its office for Australia and New Zealand, in Sydney, is headed by Bobby Bostic, an executive director and head of distribution.

Merz says that about 80 per cent of his clients now exclude tobacco producers from their portfolios. “ESG is a huge theme for super funds… Five years ago there was very little interest.”

Vontobel has about $$14 billion invested in ESG-specific products but includes ESG research and analysis across the full range of its funds. Some of the specific ESG funds are at the pointy end of the spectrum and could be called ‘impact’ investing.

Merz says that there are now more than 2,000 studies about the relationship between ESG management and financial performance around the world. In an analysis of all the empirical research by Vontobel the results are:

  • Performance effect of ESG considerations on global equities: 52 per cent positive and 4 per cent negative
  • Performance effect of ESG considerations across individual asset classes generally: Environmental – 59 per cent positive and 4 per cent negative; Social – 55 per cent positive and 5 per cent negative; Governance – 62 per cent positive and 9 per cent negative
  • Performance effect of ESG considerations in developed markets compared with emerging markets: for developed markets 38 per cent positive and 8 per cent negative, but for emerging markets 65 per cent positive and 6 per cent negative.

Merz says that big investors use different approaches to incorporating ESG factors in their portfolios. The main ones are: negative screening; positive screening; ESG integration; themed investing; and, impact investing.

Typically, negative screening will involve cutting out up to 10 per cent of the universe. Positive screening will involve focusing on up to 30 per cent of the best companies in each sector. ESG integration, which most big Australian super funds now do, involves incorporating the analysis in with traditional fundamental assessments. Themed investments are those focusing on a particular asset sub-class such as clean energy. Impact investing goes outside the traditional investment universe to look at projects which will make a difference to communities.

Most of the research with ESG has focused on the ‘G’ because there is more readily available evidence and, it appears, it has more positive impact on returns. An example is the information ratio comparisons of companies with the most gender diversity on their boards (more women) according to Morgan Stanley’s quant model are that those with most women outperform all the others across the return spectrum.

But Merz says there is still work to be done. He says the quality of data about ESG factors, especially in emerging markets, is still poor.