Sustainable

Investing

is Moving

Mainstream

April 20, 2018

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Once synonymous with simply ditching cigarettes and bulking up on green bonds, sustainable investing has seen a boom in recent years as investor demand for ethical strategies that prioritize environmental, social and governance (ESG) factors but don’t sacrifice potential returns continues to grow.

The global socially responsible investing (SRI) market is now worth almost $23 trillion, with around half of all assets managed in Europe and more than a third in the U.S. The growth of ESG assets stateside is up over 200% from the past decade and the popularity of ESG-themed Exchange-Traded Funds (ETFs) has surged since 2016, with $11 billion in assets under management (AUM) across 120 funds around the world.

ESG in numbers

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$22.8

trillion

estimated global SRI AUM

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65%

of total AUM

is still focused on bonds

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$11

billion

AUM in global ESG ETFs

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22

ESG-themed ETFs

launched in the U.S in 2016/17

=

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10%

of all new funds

launched over that period

There has been significant growth in both the number of ESG – themed ETFs and aggregate AUM since 2016

Graph

As interest in ESG is on the rise, J.P. Morgan has developed a quantitative tool, ESGQ, to help investors pick stocks in a responsible way that also outperforms the broader index.

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40%

of investors polled at a J.P. Morgan Macro Quant Conference in Oct. ‘17 are already investing in ESG strategies

Source: J.P. Morgan Quantitative & Derivatives Strategy

ESG data is often slow moving and infrequent, with MSCI ESG ratings and scores published annually in some cases. This lack of data makes it difficult for investors to get an accurate picture of how a company could perform. ESGQ combines long term corporate responsibility data with faster moving data points from two different providers, Arabesque and RepRisk. This helps isolate news flow, making it possible to shed light on any possible controversies. Momentum is then added to these scores to capture changes in sentiment and price behavior.

The results show that ESGQ provides annualized excess long return of 6% versus MSCI Europe and 4.4% versus MSC European ESG Leaders Index.

T-STAT ANN. RET. ANN. VOL. SHARPE HI-RATE MAX DD
ESGQ Excess Long 4.60 6.0% 3.4% 1.75 69.8% -2.3%
ESGQ Excess Short 0.07 0.0% 6.1% 0.00 51.2% -17.9%
ESGQ L/S 2.22 5.6% 6.9% 0.82 60.5% -9.6%
MSCI Benchmark 1.47 7.9% 16.3% 0.48 55.8% -26.6%
T-STAT ANN. RET. ANN. VOL. SHARPE HI-RATE MAX DD
ESGQ Excess Long 3.38 4.4% 3.5% 1.27 57.0% -4.3%
ESGQ Excess Short -0.92 -1.7% 4.7% -0.36 43.0% -15.4%
ESGQ L/S 3.06 6.0% 5.2% 1.15 64.0% -5.1%
MSCI Benchmark 1.58 8.5% 15.9% 0.53 58.1% -25.0%
Source: J.P. Morgan Quantitative and Derivatives Strategy, MSCI, Arabesque, RepRisk | Period: Aug. '10 tp Sep. '17

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“The issues surrounding gender pay, same pay for same work, the #metoo and #timeisup campaigns, the Oxfam affair, the extensive use of plastics in packaging, and immigration and housing issues are recent examples that demonstrate either inequality, inequitable distribution of resources or lack of accountability,” said European Equity Quant Strategist and lead ESGQ analyst, Khuram Chaudhry.

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“When ESGQ is added to traditional investment styles such as value, growth, momentum and quality, the composite returns are higher, Sharpe ratios or risk adjusted returns increase dramatically, but drawdowns are significantly lower.”

– Khuram Chaudhry,
European Equity Quant Strategist and lead ESGQ analyst

Critics of ESG investing have long seen it as an approach where investors have to sacrifice potential returns in order to match their investments with their values or mandates, but ESGQ shows how investing sustainably can actually boost returns.

“The best way for investors to capture these changes and identify new issues and controversies is to better understand the building blocks of E, S, and G. When ESGQ is added to traditional investment styles such as value, growth, momentum and quality, the composite returns are higher, Sharpe ratios or risk adjusted returns increase dramatically, but drawdowns are significantly lower,” he added.

As a firm, J.P. Morgan has also recently expanded its sustainability strategy by committing to source renewable power for 100% of its global energy needs by 2020 and to facilitate $200 billion in clean financing through 2025.

Head to J.P. Morgan Markets for more on ESG investing.

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