Why ESG investing doesn't have to be a compromise

By: Mark Stacey and Grant Wang • April 23, 2018

Responsible investing that focuses on positive environmental, social and governance (ESG) initiatives has traditionally been characterized as a compromise – good for the soul, not so good for portfolio returns.

But that need not be the case anymore. Increasingly, companies who make strong contributions to society are being found to have strong share prices that go with it, suggesting investors who want to do right can now have their cake and eat it too.

The growing recognition of ESG as an important driver of return can be attributed in large part to stricter regulations that require companies to disclose more aspects of their ESG mandates, alongside stiffer penalties for those who run afoul of them. This beefed up regulatory framework has spawned a new set of metrics to evaluate the parameters of responsible corporate behaviour, which, in turn, has given investors an expanding archive of financial data that can be used to quantify ESG winners and losers.

More than that, however, it has provided investors the ability to assess the impact, if any, such rankings may have on a company’s overall risk/return profile. As a result, mounting evidence has emerged that shows companies with favourable environmental, social and governance profiles regularly outperform their peers and exhibit positive attributes that can help mitigate potential losses. Based on some of our research, strong ESG mandates are associated with above-average risk control and compliance standards, leading to less frequent incidences of fraud, embezzlement, corruption or litigation that often coincide with heavy fines and plummeting stock values.

This isn’t to say there’s always a clear understanding of the correlation between socially responsible corporations and better performance. By most counts, there is well over 100 different ESG factors to choose from, but only a small percentage have the necessary data backing them to provide solid proof of their potential connection to future returns.

Take, for example, our new AGFiQ Enhanced Global ESG Factors ETF (QEF) which seeks to balance capital growth with societal contribution, while providing core exposure to global equities that closely track the sector and geographic allocation of those making up the MSCI ACWI Index (see chart 1).

The fund’s universe of stocks starts from the premise of excluding companies in the tobacco and defense industries as well as those with severe ESG controversies such as Eni S.P.A., a multinational oil and gas company that has been making headlines for alleged corrupt behaviour in various countries it does business.

In addition, we analysed dozens of separate ESG factors to determine which ones have significant positive correlations to future returns, but just seven (see chart 2) of these factors ended up offering enough proof for us to use them confidently in the fund. We also found that some in this group have more predictive power than others. For instance, governance scored high in our testing, as did carbon emissions and waste. At the same time, the two social sub-factors we settled on were the least predictive of positive future returns, but still provided strong enough evidence of their potential to enhance overall performance, not detract from it.

These findings aren’t set in stone, and constant monitoring and rebalancing is needed to reflect corporate changes and market events that may result in revised return expectations over time.

In doing so, we can ensure that the mandate of the fund remains consistent and relevant with the changing ESG landscape.

Ultimately, the ability to quantify environmental, social and governance factors in an objective, transparent and consistent manner is helping move responsible investing into the mainstream. Not just because it helps clarify those companies who are most committed to improving society, but because it can help improve an investor’s risk/return profile and be an important driver of future performance.

A Mainstread Investment: AGFiQ Enhanced Global ESG Factors ETF (QEF)

The Group of Seven

Environmental Social Governance
  • Carbon Emissions and Waste
  • Toxic Emissions and Waste
  • Health and Safety
  • Labour Relations/ Management
  • Percent of Women at Board level
  • Governance
  • Governance Disclosure
Mark Stacey Mark Stacey1 , MBA, CFA

Senior Vice-President, Head of Portfolio Management and Co-Chief Investment Officer

Grant Wang Grant Wang1 , M.A., PH.D., CFA

Senior Vice-President, Head of Research & Co-Chief Investment Officer

For more information on the full lineup of AGFiQ ETFs, visit AGFiQ.com.

1A registered Advising Representative in Canada with Highstreet Asset Management Inc., a subsidiary of AGF Investments Inc.

Commentaries contained herein are provided as a general source of information based on information available as of April 18, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

References to specific securities are presented for illustrative purposes only and should not be considered as investment advice or recommendations. The specific securities identified and described herein should not be considered as an indication of how the portfolio of any investment vehicle is or will be invested, and it should not be assumed that investments in the securities identified were or will be profitable.The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for, or a component or, any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limited any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com).

AGFiQ ETFs are ETFs offered by AGF Investments Inc. and managed by Highstreet Asset Management Inc. AGFiQ ETFs are listed and traded on organized Canadian exchanges and may only be bought and sold through licensed dealers.

AGFiQ Asset Management (AGFiQ) is a collaboration of investment professionals from Highstreet Asset Management Inc. (HSAM), a Canadian registered portfolio manager, and of FFCM, LLC (FFCM), a U.S. registered adviser. This collaboration makes up the quantitative investment team.

Publication date: April 23, 2018.

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