Andy Peach
“If factors always outperformed they would be a free lunch.” Andy Peach, Aon
weighted ESG products, for example, can be tricky. You are tracking something that you don’t have a long history showing that it’s going to deliver some return benefit. Scott: Trustees must take themselves away from return if they want genuine ESG. Charities and churches must accept that by moving away from market cap they are asking me to do things that are not in line with the general market. The result may be that you underperform, but you keep within your ESG beliefs. Murphy: The extent of ESG integration can impact what you are trying to achieve. At a basic level, nega- tive exclusionary screens or even positive screens can tick the box of ESG integration. We keep talking about ESG as a factor, but is it in the traditional risk premia sense? It’s too early to say. One of the pillars of factor investing is intuition. It is intuitive to invest in well governed businesses that contribute to long-term shareholder value. Whilst we do not have a long history of empirical support for ESG as a factor, like we do with financial metrics for style factors, an ESG investing philosophy certainly aligns with that intuition pillar. So how do we build it into portfolios? If you subscribe to the belief that you want exposure to ESG, like targeted exposure to value or momen- tum, then you can incorporate it into portfolio construction in a similar way. This could include creating a multi-factor + ESG score or requiring a minimum level of active ESG exposure in a portfolio optimisation, for example. We view this as a full ESG integration as opposed to negative screens, such as removing controversial weapons, for example.
September 2019 portfolio institutional roundtable: Factor investing 19
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