As the realm of ESG investing continues to evolve, discovering Alpha increasingly necessitates the usage of precise, factorised data. This shift in approach focuses less on the limitations of traditional ESG ratings and scores, and more on the power and potential of adopting a quantitative perspective.
Understanding Factorised Data:
What do we mean by ‘factorised’ data? Factorised data is quantitative, detailed information that has been standardised to enable robust comparison across various securities and portfolios. This data is an essential tool for investors, enabling them to dissect an investment’s performance and identify the specific elements or ‘factors’ driving returns.
At Impact Cubed, we create factorised data, which enhances investors’ ability to make informed, strategic investment decisions. By understanding the ‘why’ and ‘how’ of an investment’s performance, investors can refine their strategy and concentrate on the elements that genuinely matter.
In our flagship Corporate Factor Model – there are 15 factors, 11 operationally ESG focussed, and 4 revenue focussed:
Revenue FocusEnvironmentalSocialGovernanceEnvironmentally good products and servicesCarbon efficiencyEconomic developmentGender equalitySocially good products and servicesScope 3 carbon efficiencyAvoiding water scarcityExecutive payEnvironmentally harmful products and servicesWater efficiencyEmploymentBoard independenceSocially harmful products and servicesWaste generationTax gap
Companies producing environmentally beneficial products and services yielded a +4.4% return over the period
Unleashing the Power of Factorised Data:
We wanted to see the impact these different factors had on potential returns. We created model portfolios with maximum exposure to each of our 15 ESG corporate factors (holding a long/short net-zero portfolio with a 1% expected volatility).
When looking at the backtested returns over the past 78 months, the findings were revealing:
Companies producing environmentally beneficial products and services yielded a +4.4% return over the period, with firms maintaining low carbon emissions and low water usage closely following at +3.7% and +2.25% returns respectively.
Grouping the results
When we group our 15 factors into broader Environmental, Social, and Governance categories, the results are equally enlightening:
Environment: 6.39% average returns
Social: 0.62% average returns
Governance: -5.47% average returns
These results underscore that Alpha in ESG is neither uniformly distributed across all factors nor does it manifest simultaneously. Instead, finding Alpha in ESG investing necessitates a nuanced and dynamic approach.
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The Key Takeaway:
The ESG Alpha has merely been obscured by traditional ESG rating systems. When we adopt a nuanced, factorised approach, the path to ESG Alpha becomes clear. This is the power and potential of factorised data in ESG investing.
Did you know?
You can now access an instant preview version of our platform – allowing you to analyse and report on real-impact data from some of the world’s largest funds.
Why not ask us about our new Smart ESG portfolio solution? You can optimise your portfolio using any of our factors to increase impact whilst reducing risk.