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February 16, 2022

ESG SET OF PREFERENCES, NOT STRATEGY

A deep dive into ESG-themed indices shows that they’re all but indistinguishable from traditional benchmarks, says Research Affiliates. In a report, it builds a case that ESG (environmental, social, and governance) is a set of investor preferences and not an investment strategy. The ESG indices do not stand out from traditional benchmarks when analyzed by popular valuation metrics, it says. The price-to-dividend ratio, for example, clocks in at an average of 82.7 for Russell 1000 companies and ranges between 80.9 and 96.3 for companies in the ESG indices. The price-to-earnings ratio, price-to-cash flow ratio, and price-to-sales ratio also differ very little between the ESG indices and the benchmark. When it comes to performance, the five largest ESG indices and the Russell 1000 have generated almost identical returns over the past 2½ years, it says. This has prompted its researchers to dismiss ESG as an investment strategy. A strategy, they argue, should include “a set of decisions that governs allocation and timing of capital among the portfolio’s positions.” But existing ESG index providers have merely made minor adjustments to their cap-weighted counterparts to incorporate their own ESG preferences or desires. If ESG is a preference, not a strategy, investors then can apply it to any investment discipline, it says. Investors who want to focus on environmentally sustainable companies, for instance, can incorporate those into cap-weighted strategies, or they can layer those into factor-tilted strategies such as low volatility, quality, or momentum.

February 16, 2022

RI PRACTICES GAIN MOMENTUM

Responsible investment (RI) practices have overall continued to gain momentum among members of the Pension Investment Association of Canada (PIAC), says Lu Yao, associate portfolio manager, public equities, at UTAM. She sits on PIAC’s investor stewardship committee and helped develop the responsible investment survey and analyze the results. “In the survey, we see improvements across all categories, including policy development, environmental, social, and governance (ESG) integration, proxy voting, engagement, and participation in collaborative initiatives,” says Lu. It found 87.5 per cent reported they have implemented a responsible investment policy or similar guidelines. In 2018, only 65 per cent had an RI policy. ESG integration was the most widely implemented responsible investment strategy, used by 90 per cent of respondents. Environmental and social (ES) considerations also factored into proxy voting decisions, with 90 per cent of respondents including ES in proxy voting policies, compared to 45 per cent in 2018. The percentage of respondents engaging directly with investee companies increased slightly to 38 per cent, from 35 per cent in the previous survey. And 43 per cent of respondents have adopted an engagement policy, compared to only 25 per cent in 2018.

February 16, 2022