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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.
Graph
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.
“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.
