Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – Is ESG A Magic Green Button?

Have you read any research on ESG investing recently? If you have, then you’ll know that academic studies continue to stress the positive alpha-generating potential of ESG factors. Research demonstrates that there are positive links across all three factors: Environmental, Social and Governance.


Source: Friede, Busch, Bassen (ESG & Corporate Financial Performance: Mapping the global landscape). September 2016

In our view, there are three key reasons that sustainability analysis can be an effective source of investment alpha as part of a disciplined investment process:

  1. Sustainability factors can have a direct impact on a company’s near-term operational performance and long-term strategic positioning. Simply put, we believe making and selling a potentially environmentally damaging product and being irresponsible in how it is done is ultimately likely to destroy shareholder value, while doing the opposite has the potential to generate significant alpha.

  2. Sustainability factors are often ignored or demoted during “traditional” fundamental analysis in favor of more tangible financial factors. In essence, there is the potential for unappreciated and unharvested alpha here; and

  3. We believe traditional fundamental analysts are poorly trained or educated around what sustainability analysis really is, cynically basing their opinions on the false positives and negatives they have experienced from ESG screens. Hint: ESG screens are limited and heavily influenced by immaterial factors, don’t factor in product impact and treat all companies the same regardless of industry or business model.

To be clear, we are not saying sustainability analysis will magically make your fund manager a great stock picker, but we believe it has the potential to help, particularly when combined with traditional fundamental analysis, and evidence suggests even more particularly when used in less well covered areas of the market such as assessing disruptive growth companies or those located in emerging markets.

We believe that the companies making more significant contributions to the world’s sustainability challenges are likely to be innovative and disruptive companies, which are younger and smaller than the companies they are challenging. Naturally then, you would expect them to still be evolving and improving and it is this improvement that is often rewarded by the market in valuation terms.

Despite increasing evidence, some still vehemently oppose sustainable and ESG investing, but the seeds of change can take time. For example, a November 2018 Monmouth poll found that 78% of Americans now believe climate change is real, up from 70% three years ago; moving in the right direction, in our opinion, but still not overwhelming. We see some similarities in the ESG investing debate.

Much like climate change, hard line deniers of the potential benefits of incorporating ESG factors in their investment portfolios will probably never shift their position, but we believe many “swing voters” are still in the wrong camp. Interestingly, we saw a survey that suggested a majority want to see incontrovertible proof of sustainability’s alpha-generating ability before accepting it. We think this is unfortunate because incontrovertible proof can never be found. Indeed, when compared to other studies of investment performance factors, no other suggested alpha factors require such a high burden of proof to be accepted. If – like us – you believe the mantra that “the only way to make money is to be contrarian and right,” then this could look like a potential opportunity.

What we suspect is at play here is a communication problem. We believe that the arguments put forward for ESG investing often have been dry and somewhat timid. What’s more, we have long suspected that the way discussions are framed between advisors and end investors heavily influence the way the topic is ultimately viewed. In fact, we were so convinced that we carried out our own survey in which nearly 600 respondents were split into two groups, one receiving positively framed questions and the other negatively framed ones.

The results were stark. Both groups believed that companies benefit from acting sustainably (and that there are risks if they don’t) regardless of how the questions were framed. However, when considering the implications on fund manager performance from investing in companies with positive ESG scores, the results from each group were significantly different. A positively framed question led to strong agreement of a performance benefit. In contrast, negative framing led to more respondents suggesting it would hurt fund manager performance than help it.


Source: Kames Capital

To us, this seems like a contradiction. On one hand, respondents believe companies and their share prices will benefit from being sustainable, but on the other hand fund managers who invest in such companies will suffer a performance cost. It certainly seemed to reinforce our belief that the way discussions between advisors and investors are framed is all important when it comes to the growth of sustainable investing.

We believe it is becoming increasingly difficult to ignore the growing body of evidence that suggests sustainable investing could be a powerful alpha-generating tool. Some may never be converted but framing discussions in a more positive way and unashamedly emphasizing the positive points – including alpha potential – to investing sustainably can help communicate the potential benefits to investors more effectively. Just remember: there is no magic green button that a fund manager can press to ensure their strategy will always outperform and be perfectly sustainable. We believe incorporating sustainability analysis into the investment process has the potential to help the odds in the manager’s favor.


CRN: 2019-0906-7665 R

The opinions and views of this commentary are that of Kames Capital and are not necessarily that of AAM.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



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