Alternative Investment Industry Weighs in on ESG Quant Investing

October, 2016 – There is no way to ignore the rising importance of environmental, social and governance (ESG) metrics. From global warming to the unethical treatment of overseas factory workers, ESG issues have begun dominating headlines, as the ramifications of ignoring them have become increasingly clear –a reality driven home by the nosedive Volkswagen’s stock price took last year immediately after it was revealed the company had manipulated its U.S. emissions test.

Given the heightened attention to ESG metrics, investors have become increasingly focused on companies’ sustainability efforts when it comes to choosing the companies they will invest in.  So it is no surprise that quantitative investors have also begun relying on ESG metrics as a way of identifying the most promising long-term investment opportunities, as well as those that should be avoided. To see how the investment community’s acceptance of ESG parameters is impacting quantitative investing, The New York Hedge Fund Roundtable recently surveyed its membership about the topic.

ESG Quant Investing was the topic of the Roundtable’s most recent event in late September, where Andreas Feiner, a founding partner of Arabesque Asset Management, discussed the various ways ESG parameters can be used by quant funds in a long/short investment portfolio. “Studies show the positive correlation between ESG and company performance, and every major university is now really looking into the topic,” Feiner told attendees at the Roundtable’s event. “ESG is a way of looking into the DNA of a company. ESG is to investors what x-ray was to medicine –it helps to increase the transparency,” he said.

Roundtable members believe that ESG criteria can help investors within the alternative investment industry identify better stocks and outperform other strategies. At the moment, however, Roundtable members think there is not yet enough consistency in ESG reporting for quantitative funds to rely on them.

New York Hedge Fund Roundtable members had the opportunity to weigh in on this topic both at the most recent Roundtable event in late September, as well as through an online electronic poll.

*Of the respondents to this survey, 41% were fund managers; 18% were allocators; 9% were risk management or trading; 29% were service providers; and 3% were other industry participants.

Following are some of the other key findings of that survey:

  • Asked whether they believe that ESG criteria can be used in a quantitative way, 78% of respondents said yes, while 22% said no.
  • When asked if they think the quality of ESG is good enough for a quantitative fund to rely on, 59% of respondents said that, despite the growing focus on sustainability reporting, they believe the lack of consistency in the parameters companies use to measure their efforts and the quality of reports they produce means it isn’t yet good enough to count on; while 41% said they think that companies have stepped up the quality of their reporting in this area because of investors’ increased emphasis on sustainability efforts.
  • 56% of respondents said they think that companies that acknowledge the importance of ESG criteria are more likely to deliver superior, long-term risk-adjusted performance than their peers who don’t; while 44% of respondents believe that the importance of ESG criteria is overblown and that they ultimately play a very minimal role in a company’s performance.
  • 52% of respondents said their firms consider whether or not companies practice sustainability reporting when choosing where to invest; while 48% of respondents said this is not something their firms worry about.
  • When asked to identify the ESG metric they believe is of the greatest importance for identifying promising companies on a long-term basis, 33% of respondents said it is climate change; 22% selected the accountability of boards; 15% said it is a company’s relations with its employees; another 15% said it is a company’s focus on its reputation; 11% said it is moral values; and 4% said it is community relations.
  • Asked to identify the ESG issue they believe is of the least importance for identifying promising companies on a long-term basis, 50% of respondents selected climate change; 19% said it is a company’s focus on its reputations; 15% said it is moral values; 5.5% said it is a company’s relations with its employees; another 5.5% said it is community relations; and 5% chose the accountability of boards.

September’s “bonus” question: Roundtable members were asked if they agree with San Francisco 49ers player Colin Kaepernick’s decision to sit during the National Anthem as a way of protesting police brutality and the treatment of people of color in the U.S. 46% of respondents said they think Kaepernick’s decision to sit is justified because it has drawn more attention to these issues than anything else probably would have; 31% said that, while Kaepernick’s motivation may have been good, they think his action has been more divisive than anything; and 23% think that a football game is an inappropriate place to take such a stand.

About The New York Hedge Fund Roundtable:

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers. Monthly events center around thought-provoking speakers and panels designed to keep members apprised of timely and important issues within the alternative investment industry. The Roundtable’s goal is to provide a forum for thought leadership, where industry professional have the opportunity to enhance their knowledge and skills and to network with other individuals committed to advancing the industry with the highest ethical standards. For additional information about the Roundtable, visit: http://www.nyhfr.org

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