NYHFR Survey: ESG Metrics Are Relevant, But Consistency is Lacking

Oct 13 2016 | 9:09pm ET

Inclusion of environmental, social and governance (ESG) metrics into investment processes has steadily increased over the past decade, and the ramifications of ignoring them have been illustrated by the likes of global corporations like Volkswagen. 

Given the heightened attention, quantitative investors have begun relying on ESG metrics as a way of identifying the most promising long-term investment opportunities, as well as pinpointing those that should be avoided. 

However, the jury is still out – and opinions still very mixed – as to whether ESG parameters play a role in determining long-term investment outcomes. To see how the investment community’s acceptance of ESG parameters is impacting quantitative investing, The New York Hedge Fund Roundtable (NYHFR) surveyed its membership about the topic. 

“Studies show the positive correlation between ESG and company performance, and every major university is now really looking into the topic,” said Andreas Feiner, a founding partner of Arabesque Asset Management, at NYHFR’s September event. “ESG is a way of looking into the DNA of a company. ESG is to investors what x-ray was to medicine – it helps to increase the transparency,” he said.

That said, although Roundtable members broadly believe that ESG criteria can help investors within the alternative investment industry identify better stocks and outperform other strategies, they also feel there is not yet enough consistency in ESG reporting for quantitative funds to rely on them. Moreover, a sizeable minority feel the importance of ESG is overblown and it ultimately plays a minimal role in company performance.

Key findings from NYHFR’s ESG survey: 

  • Asked whether they believe that ESG criteria can be used in a quantitative way, 78% of respondents said yes, while 22% said no.
  • When asked if they think the quality of ESG is good enough for a quantitative fund to rely on, 59% of respondents said that, despite the growing focus on sustainability reporting, a lack of consistency in the parameters companies use to measure their efforts, and the quality of reports produced, means it isn’t yet good enough to count on.
  • 41% said they think that companies have stepped up the quality of their reporting in this area because of investors’ increased emphasis on sustainability efforts.
  • 56% of respondents said companies that acknowledge the importance of ESG criteria are more likely to deliver superior, long-term risk-adjusted performance than those who don’t, while 44% of respondents believe that the importance of ESG criteria is overblown and that they ultimately play a very minimal role in a company’s performance.
  • 52% of respondents said their firms consider whether companies practice sustainability reporting when choosing where to invest; while 48% of respondents said this is not something their firms worry about.
  • When asked to identify the ESG metric they believe is of the greatest importance for identifying promising companies on a long-term basis, 33% of respondents said climate change; 22% selected the accountability of boards; 15% said it is a company’s relations with its employees; another 15% said it is a company’s focus on its reputation; 11% said it is moral values; and 4% said it is community relations.
  • Asked to identify the ESG issue they believe is of the least importance for identifying promising companies on a long-term basis, 50% of respondents selected climate change; 19% said it is a company’s focus on its reputations; 15% said it is moral values; 5.5% said it is a company’s relations with its employees; another 5.5% said it is community relations; and 5% chose the accountability of boards.

Each NYHFR survey includes an interesting bonus question, which for September asked whether members agree with San Francisco 49ers player Colin Kaepernick’s decision to sit during the U.S. national anthem in protest against police brutality and the treatment of people of color: 

  • 46% of respondents thought Kaepernick’s decision was justified because it has drawn attention to these issues.
  • 31% said that although Kaepernick’s motivation may have been good, his action has been divisive.
  • 23% thought a football game is an inappropriate place to take such a stand. 

Of the respondents to this survey, 41% were fund managers,18% were allocators, 9% were risk management or trading, 29% were service providers, and 3% were other industry participants.

The New York Hedge Fund Roundtable is a non-profit organization focused on promoting ethics and best practices within the alternative investment industry. The membership consists of investors, fund managers and other industry professionals who regularly meet to discuss current issues within the industry and connect with peers.

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