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Matter of factor We also looked at the factors (risk premia) that the energy sector has contributed over time. The decline in the oil price from 2014 left the energy sector heavily overweight the value factor (although this has moderated). This led some to presume that negative screens systematically underweight value, but this is not the case. Recently, excluding energy has certainly left portfolios underweight value, but not so long ago, quality and momentum were major forces in the energy index. Investors may recently have been willing to forgo value exposure because of underperformance, but would they have wanted to minimise quality and momentum factors in previous market conditions?
Portfolio permutations In summary, traditional negative screens may be appropriate for investors who must avoid certain sec- tors. But others could preserve diversification without sacrificing their ESG criteria, by integrating those criteria into their investment process in more nuanced ways. The exploration of innovative and effective ways to incorporate ESG is the focus of our current “friend or foe” research. At Legal & General Investment Management, we believe ESG scoring provides a framework for engag- ing the companies in which we invest, and also allows us to tilt portfolios to reflect ESG criteria while maintaining diversification.
Important notice
Past performance is no guarantee of future results. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and Regulated by the Financial Conduct Authority, No. 119272.
November 2019 portfolio institutional roundtable: Responsible investing 27
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