Are systematic strategies a force for good in responsible investment?

by Adrienne Lawler
March 25, 2019

Are systematic strategies a force for good in responsible investment?

Jonathan Harris, Co- Founder & Chief Analyst of Engaged Tracking talks to Oonagh McQuillan of RAOGlobal about whether systematic strategies are a force for good in responsible investment?

October 2018

Q. Are systematic strategies a force for good in responsible investment?

A. Yes, by generating demand for better quality, more consistent data systematic strategy managers are helping develop responsible investment, which is often quite fuzzy, into a robust and scalable part of finance. While there is still a long way to go, better data and more transparency is likely to ultimately be a benefit to all. 

Q. Why are a growing number of quant managers integrating ESG factors into their valuation models and investment decisions?

A. Fundamentally ESG factors represent additional information, which should add value as long as it is high quality and uncorrelated with other sources of information. The quality of ESG data continues to improve and there is growing evidence many ESG factors are additive sources of information on top of traditional factors. 

Q .What other factors do quant managers need to take into consideration when performing ESG integration?

A.A recent survey showed that the number one motivation for investors to integrate ESG is currently to protect reputation, followed by a sense of obligation, and then by the potential to improve returns and better manage risk. These motivations may be more or less relevant for different types of systematic investors, but the potential tension between these motivations is something to consider. As an extreme example, suppose an investor had a source of ESG information which they find predicts outperformance for the worst scoring companies: would they want to use this in a strategy? 

Q. Are there links between ESG ratings and future risk?

A. Yes, and there is growing evidence ESG ratings can be used to select investments with lower volatility. That said, there can be nonlinearities. As an intuitive example, a company that makes a new environmental technology could score very well on ESG but be highly risky if their business model depends on fluctuating environmental policies.  

Events like RAOGlobal, which are truly able to incorporate the individual challenges – and opportunities – facing the World’s investment community are critical. I look forward to the chance of discussing radical ideas with my peers.

Jonathan Harris will be speaking at RAOGlobal on Oct 8th at Church House, Westminster. Tickets can be booked here.

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