Gavin Smith, PhD, appeared on ausbiz to discuss ESG investing.
Read the transcript
Interviewer: Let's just change tact. Talk about ESG, ESG Strategies, we've talked about it many times on the programme, performing pretty well through the course of the crisis, so is that it or is there more to come? Let’s talk to Gavin Smith, Head of Equity Research at QMA live from New York.
Gavin, welcome to the programme. Most of the people that we're speaking to on the programme say that ESG has not missed a beat through this pandemic. However, you know are there still lessons to be learned?
Gavin: Yeah, absolutely we have seen ESG perform very well through this crisis through the course of 2020. Some people have said this is just because ESG strategies are very defensive in nature. That would hold true if ESG strategies only performed well in the first quarter where we saw markets collapse. But we've seen ESG strategies perform very well in the second quarter as well when markets rebounded, so there's more to it than just defensiveness. Sustainability is really paying off. But what we're seeing longer term as well is the ability of ESG strategies to be more valuable just outside of this crisis episode as well.
But it really comes down to the design of these strategies in the past, more poorly designed strategies have struggled since how they evaluate ESG, how they integrate ESG, but better design strategies such as, well, quantitative investors can offer their well suited to delivering more attractive performance in the long run. So, a lot of lessons about how we evaluate and how we integrate ESG into portfolios
Interviewer: Yeah, well, what separates well designed ESG strategy say from a poorly designed ESG strategy?
Gavin: Sure, I think first off, with how you evaluate ESG, all these poorly designed ESG strategies in the past have taken a one size fits all approach to how they evaluate ESG. ESG is much more nuanced than that. You have to get much more refined. You have to think of those ESG metrics that are specific within certain industries, for instance. So being smarter about not just one size fits all being more customized in that regard.
ESG strategies have struggled as well, be more poorly designed in the past too, because they've fallen victim to what I described as greenwashed firms. Think of them as being ESG traps, if you like. These are firms that look like they're good ESG, but they're really bad ESG and can act as an anchor away on performance of strategies. So, it's features like that about how people evaluate ESG can definitely be improved, but there's a second dimension here as well in terms of how ESG is integrated into portfolios. These poorly designed strategies have simply integrated ESG through exclusion. Knocking out segments of the market and that can act as a further drag on performance, at least at a cost through increased active risk. So smarter strategies can evaluate ESG in a more effective way and also integrated ESG in a smarter way as well.
Interviewer: OK, So what should investors make of all of this information? I mean, it's such a topic of conversation, lots of people looking for some sort of ethical overlay on their investment strategy. But where to from here?
Gavin: Absolutely. So, there's a big burden on a lot of investors as we look forward a big burden to integrate ESG more into their investment approach you're seeing that's definitely the case for asset owners. For instance, look at a lot of the momentum behind some of these initiatives we're seeing globally, such as the EU plan for financing sustainable growth. There's this burden on investors to integrate ESG, but it's not easy to do. Think of how you, as an asset owner how you make an index investment more ESG friendly, how do you add ESG to higher active share strategies in the equity space. How do you add ESG to more alternative type strategies? So, this is where we think as we look forward asset managers can really partner with asset owners help come up with these solutions they need to integrate ESG into their investment approaches. So, for us it's much more solution oriented and the ability to engineer these solutions for asset owners.
Interviewer: Alright, it's a big conversation. Will pick up at a later date. Gavin Smith, Head of Equity Research and Senior Portfolio Manager at QMA. Thanks for joining us today.
Gavin: Thank you.