How so-called “ESG laggards” can drive alpha

In Kürze

Companies that have a poor ESG score but are on track to improve tend to drive outperformance over companies with static ESG records, explain the Investment, ESG and Research teams at Generali Insurance Asset Management S.p.A. Società di gestione del risparmio (GIAM).
  • We believe there is value, both financially and in social and environmental terms, in engaging with so-called ESG laggards to help them improve.
  • Companies with a low but improving ESG profile tend to outperform the market and their industries.
  • A broad, experienced, collaborative ESG team that is integrated across the investment process is crucial for identifying the ESG laggards on the verge of improving, while avoiding the ones that will not.

 

ESG analysis is at the heart of our sustainable investment strategy. We aim to deepen our understanding of companies by going beyond ESG scores, using a broad and detailed framework to find buying opportunities even among so-called “ESG laggards”.

Our view, informed by our proprietary analysis, is that a combination of financial as well as ESG analysis can enable active managers to identify companies set to improve their ESG score and outperform the market.

We continually add ESG analysts to our team to strengthen our analysis and active ownership capabilities, and provide our clients with a robust investment process that meets their ESG targets while sourcing excess returns.

 

ESG momentum: Why improving ESG laggards are important

ESG momentum refers to how a company’s ESG characteristics change over time. Those with positive momentum are improving their ESG practices. Examples could include setting more competitive carbon reduction targets or improving gender diversity on the board of directors. Our research shows that improvement in ESG characteristics is not only reflected in a company’s share price but also its underlying financials, leading to greater long-term value for investors.

ESG laggards that want to improve their ESG standing can understandably face skepticism from investors. Many investors prefer to invest in companies that already have a strong ESG track record, in order to lower potential risks. This means there can be an opportunity to enhance returns by investing when a company focuses on improving its ESG approach before the rest of the market catches up. This is why, at GIAM, we believe there is value, both financially and in social and environmental terms, in engaging with ESG laggards to help them improve.

 

Does the ESG score or the ESG momentum drive outperformance?

Does the ESG score or the ESG momentum of a single company drive outperformance, or a combination of both?

To answer this question, our Insurance & Asset Management Research team analysed companies included in the MSCI Europe in the last 10 years, dividing them into quintiles based ontheir Eikon Refinitiv ESG Score.  …

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LDI solutions and multi-asset portfolio management

Generali Insurance Asset Management (GIAM) is specialized in Liability Driven (LDI) solutions, leveraging a track record of solid performance in Generali Group insurance companies' portfolios and pension funds mandates.

GIAM offers LDI capabilities and solutions, Strategic Asset Allocation (SAA) and Capital Management, and benefit from extensive proprietary research and ESG analysis resources.

GIAM is part of Generali Investments' ecosystem of asset management firms.

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LDI newsletter ǀ How so-called ESG laggards can drive alpha
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