Bart Goosens
CFA, Co-Global Head of Equity Management
60 seconds with the portfolio manager
Benefit from “double alpha”
Vincent Compiègne
Global Head of Sustainable Investing
How can investors benefit from an ESG approach?
The ESG rationale is simple but effective: a company’s commercial activities are a source of both opportunities and risks. These cannot be fully captured by financial indicators alone. This is where ESG analysis comes in.
The in-depth study of environmental, social and corporate governance aspects carried out by ESG specialists makes it possible to identify risks and opportunities that escape financial analysis. In our view, companies identified through ESG criteria are more likely to deliver sustainable earnings growth over the long term. Growth so prized by investors.
What makes Candriam’s approach to sustainable investment different?
First and foremost: We’ve been incorporating ESG analysis into out investing for over 25 years!
Today, we benefit from a large proprietary database that we update and improve daily, and which covers thousands of securities.
We assess companies by their ability to create value while integrating sustainability into their economic activities. We also check that these companies incorporate the interests of the various stakeholders.
Our proprietary analysis is supplemented by a normative control and a check on exposure to controversial activities such as armaments, tobacco, thermal coal and other activities that we consider unsustainable. We also exclude companies that do not comply with one or more of the ten United Nations Global Compact Principles, covering the four themes: Human rights, labour, environment and anti-corruption.
The ESG analysis[2] therefore narrows the investment universe[3] to those companies with the highest ratings under to our criteria.
What are the advantages of a quantitative approach applied to this best-in-universe ESG universe?
Investors in international equities are faced with an overabundance of information, making it difficult to isolate and focus on relevant performance factors. For some investors, this can even mean taking a very short-term view and making decisions that are excessively dependent on emotions and unconscious biases. Our quantitative management team strives to overcome these difficulties by basing investment decisions on a varied range of tried and tested criteria, which are objectively selected and applied consistently applied across the pre-screened universe of the best ESG stocks.
A number of investment drivers such as valuation, sentiment, quality and growth have been identified based on academic research, Candriam’s proprietary research, and over ten years’ of practical market experience.
Based on these investment factors, the team builds a fundamental factor risk model and calculates factor risk and return estimates. These estimates are then combined using a proprietary framework to produce an expected alpha score (risk-adjusted return) for each stock in the universe.
These factors are incorporated into a fundamental risk model developed in-house. The team then calculates risk and return estimates that are used to produce an expected alpha score (risk-adjusted return) for each security.
Stocks with a high alpha score tend, on average, to have a positive valuation and good growth prospects, be profitable and benefit from positive market sentiment, while the opposite is true for stocks with a low alpha score.
We believe this creates an all-weather approach to stock selection, because by using a diverse array of factors, the methodology is specifically designed to generate alpha in most market conditions.
What is Candriam’s added value in this strategy?
Within the wide range of investment solutions available to investors, this combination of ESG and quantitative analysis is relatively original. It’s also an approach that has been successfully tried and tested for over ten years now.
Our global ESG strategy is invested in attractive stocks from both an ESG and a financial point of view. It thus effectively captures the potential alpha generated by two complementary approaches.Many ESG factors are considered more “qualitative”, while this quantitative approach makes it possible to systematically seek performance factors that might be less well captured by ESG analysis.
[1] Environmental, Social & Governance.
[2] The ESG analysis covers all securities in the strategy, excluding deposits, cash and index derivatives.
[3] We only invest in sectors that are not eliminated by the Candriam Exclusion Policy. This document can be consulted at https://www.candriam.com/siteassets/medias/publications/sri-publications--- candriam-policies/exclusion-policy.pdf
The main risks of the strategy are
Risk of capital loss
There is no guarantee for investors relating to the capital invested in the sub-fund in question, and investors may not receive back the full amount invested.
Equity risk:
Some strategies may be exposed to equity market risk through direct investment (through transferable securities and/or derivative products). These investments, which generate long or short exposure, may entail a risk of substantial losses. A variation in the equity market in the reverse direction to the positions can lead to the risk of losses and may cause the performance to fall.
ESG Investment Risk:
The non-financial objectives presented in this document are based upon the realization of assumptions made by Candriam. These assumptions are made according to Candriam’s ESG rating models, the implementation of which necessitates access to various quantitative as well as qualitative data, depending on the sector and the exact activities of a given company. The availability, the quality and the reliability of these data can vary, and therefore can affect Candriam’s ESG ratings.
Foreign exchange risk:
Foreign exchange risk derives from the strategy’s direct investments and its investments in forward financial instruments, resulting in exposure to a currency other than its valuation currency. Changes in the exchange rate of this currency in relation to that of the strategy may negatively affect the value of assets in the portfolio.
Model risk:
The management process of some strategies relies on establishing a model which is used to identify signals based on past statistical results. There is a risk that the model is inefficient and that the strategies will perform poorly. There is no guarantee that past market situations will be reproduced in the future.