ESG performance analysis: supporting sustainable investing

Monday, March 9, 2020 | By Ian Searle, Head of Performance & Attribution EMEA at SS&C Technologies

ESG performance analysis: supporting sustainable investing

“Change is coming, whether you like it or not,” said environmental activist Greta Thunberg last year in support of the millions of people across the globe marching to combat climate change. As Ms. Thunberg flies the flag for environmental awareness, many investors are increasingly taking a closer look at their portfolios and whether they could do well by doing good. According to a recent study, 80% of the world’s 500 largest asset managers report greater client interest in sustainable investing. These firms also saw environmental, social and governance (ESG) investment mandates increase by more than 20% in 2018.

To meet client demand for sustainable investing, investment managers need insight into potential investments’ scores across various ESG criteria, and the ability to analyze their impact on portfolio performance in the same rigorous manner as any other investment.

Investors can deploy a range of tactics to test the suitability and potential returns of ESG assets.

  • ESG indices, which contain stocks that score high on the sustainability factors, enable prospective investors to analyze in detail not only relative performance versus traditional indices, but also their own sustainably invested portfolios.  Customized benchmarking, available from SS&C Sylvan, helps clients construct and track their own sustainable investing comparisons.
  • Portfolio attribution tools, like Sylvan’s User-Defined Attribution, help investors obtain added insight, such as identifying where sector allocation or security selection have added or detracted value, and grouping securities based upon their scores across ESG pillars and themes and tracking their impact on a portfolio.
  • Negative screens also help investors avoid assets, such as tobacco stocks, while norms-based screens showcase assets’ compliance with a given set of standards. At SS&C, we ensure that data can be captured easily, integrated and utilized by performance teams to gauge investments’ suitability and sustainability.

Overall, investors are not sacrificing performance for sustainability. Through the end of 2019, global ESG indices have performed broadly in line with their mainstream cousins over most periods. Outside of North America, the MSCI EAFE indices show a moderate outperformance over the long term.  Further Sylvan analysis shows that statistics such as dividend yield and P/E ratio as well as ex-post measures of volatility closely align. Breaking this down further, our attribution models make it possible to see which sectors and securities are responsible for the outperformance.

Sustainable investing assets stood at $30.7 trillion at the start of 2018, a 34 percent increase in two years, according to Global Sustainable Investing Review. The next generation of investors are expected to place increasing emphasis on responsible and sustainable investing. Demonstrating that positive investment outcomes and ESG are not mutually exclusive can encourage a continued increase in the adoption of these strategies.

So, while change may be coming, investors need not fear that it will be at the expense of investment returns. Through solutions such as SS&C Sylvan, they can continue to analyze their sustainably invested portfolios, understand performance drivers and capture compelling ESG investment opportunities ahead.

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