ASSET4 Articles and Studies
China's Rising Resource Consumption
Implications and Opportunities for Utilities
We identified top performers within the Chinese Water Utilities sector, based on their historical operating efficiency, that are most likely to benefit from potential opportunities in China’s resource management. These companies, as a group, have outperformed their overall sector index significantly over the last five years. A China Water Utilities – Top Operating Efficiency Index can aid long-term investors looking to play the resource management theme with exposure to Chinese equities.
Read the full report from Thomson Reuters Proprietary Research here.
ESG Practices Across Developed Markets
Comparison of Trends Across Americas, Europe, and Asia
Environmental, social, and corporate governance (ESG) issues are increasingly gaining attention from all types of stakeholders, ranging from government to media to investors and asset managers. As more asset managers assess ESG exposure, and even use it as a basis for investing, it becomes important to understand and evaluate the degree to which ESG efforts can be maintained, creating long-term value, while reducing risk.
Read the full report from Thomson Reuters Proprietary Research here.
Guide Short Term, Create Value Long Term
Companies That Issue Quarterly Guidance Score Higher on ESG Metrics
Given some of the concerns in the market that companies that issue earnings guidance focus too much on short-term profits, it would be interesting to see if ESG (environmental, social and corporate governance) scores, which indicate a focus on long-term value, confirm this thesis. This note examines if there is a link between corporate guidance and ESG scores.
Read the full report from Thomson Reuters Proprietary Research here.
New StarMine Quant Research Note on ASSET4 Data
The StarMine research note "shows that ASSET4’s ESG overall score and pillar scores have significant value as stock selection factors with their value generally increasing with the duration of the investment horizon."
This is consistent with the "theory that the ASSET4 ESG scores represent an overall measure of the quality of a company’s business practices, identifying those companies that look beyond the next quarter and manage with an emphasis on creating long-term shareholder value."
For a copy of the study, please contact us at info@asset4.com.
Integrating ESG - The Next Phase
While socially responsible investors have for many years used ESG – environmental, social and corporate governance – information to screen their investments for extra-financial risks, the integration of this information into traditional financial analysis has been viewed by many as the next phase in the maturation of responsible investment.
ESG ‘integration’ refers to the use of ESG data in determining company valuations and requires making a link between extra-financial information and financial performance. Many academic and financial research studies have attempted to make this connection by examining the relative stock market performance of companies based on ESG screening or criteria. These studies have provided very mixed results, however, for two reasons: they have generally involved the examination of the relative performance of SRI funds, or they have examined a company’s stock market performance based on ESG ratings independently of financial factors. The first approach suffers from being a reflection of the relative performance of fund managers rather than the role of ESG data, and the second suffers from studying ESG data in isolation from financial information and analysis.
To understand integration as a strategy, it is necessary first to develop models that use ESG data not independently of financial analysis, but as a means of enhancing financial analysis directly. Only on the basis of such models can integration truly be pursued by mainstream investors and consequently studied in terms of its implications for stock market returns.
To read the complete article, click here.
QSG Study: Adding Value through Environmental, Social & Corporate Governance Information
Executive Summary
For many years, Environmental, Social and Governance (ESG) signals have been a consideration in the investment decision process for socially responsible investors, but rarely been an integral component for managers outside that core group. The key question has historically been, “Is there alpha in ESG signals?” To better answer this, ASSET4 asked the Quantitative Services Group (QSG) to evaluate ESG signals and their impact on cross sectional stock returns. After a comprehensive analysis, QSG identified significant evidence to support the benefits of incorporating ESG signals into the stock selection process for managers of all types.
In their study, QSG used ASSET4’s economic, environmental, social and corporate governance pillar scores to test the performance of US stocks based on their ESG characteristics. ASSET4 information is constructed using a framework consisting of over 250 key performance indicators taken from 900 individual data points. It should be noted that ASSET4 also covers a significant number of securities outside of the US that were not included in this study.
To arrive at a single aggregate ESG score by company, the four ASSET4 pillar scores were normalized and combined on an equal weighted basis. Quintile portfolios were formed on a monthly basis, with the top quintile representing the most highly ranked ESG companies. The test period ran from 06/30/2003-09/30/2009, and the top quintile securities were found to outperform the equal-weight Russell 1000 by an annualized amount of over 300bps.
QSG also combined the ASSET4 data with a proprietary stock selection model blending value, earnings, and price momentum signals. This combination of ESG signals and the QSG Value Momentum Model also yielded significant excess return versus the EQWT Russell 1000 over the test period.
In summary, QSG revealed impressive performance results for both stand alone and integrated ESG approaches. They confirmed that investment managers can blend qualitative and quantitative analyses by combining analytical modeling approaches with ESG information; where value is created from picking sustainable performance leaders and avoiding future laggards. Results clearly illustrated a positive relationship between ESG factors and financial performance.
For a copy of the complete report, please contact info@asset4.com.
ESG data and management quality: lessons from the investment banks
The US investment banks that survived the credit crisis performed better on ESG issues than those that didn’t. This perhaps surprising correlation suggests a strong indicator of management quality: managements able to assess and mitigate longer-term strategic risks to their business are also better equipped to cope with a crisis.
ASSET4 identified 10 factors for which the performance of Morgan Stanley, Goldman Sachs and Merrill Lynch was clearly better than Lehman Brothers and Bear Stearns for FY 2006. While out-performance on these factors correlated with the investment banks that survived the financial crisis, it is important also to examine these factors and their relationship to the financial performance of other capital markets companies. By combining these 10 ESG criteria into a unique rating framework using the ASSET4 system, it is possible to examine the correlation of these factors with price performance over time. Doing so reveals quite interesting parallels.
Among all US capital markets and commercial banks, companies with relatively higher scores (greater than 50 percentile) on these 10 ESG factors out-performed those with lower scores between 2006 to 2008 by 14.4% on average.
To read the entire article, please click here.
The Importance of Consistent and Comparable ESG Performance Data
For the attendees to the Responsible Investor "Integrating ESG into Mainstream Portfolios" conference in Amsterdam, ASSET4's Director of Data Content, Christopher Greenwald, prepared the following article . . .
Socially responsible investment (SRI) funds have experienced remarkable growth since the mid-1990s, and the total market size of SRI initiatives in Europe reached €2.7trn in 2007, according to the European Social Investment Forum. The impressive growth in responsible investment mandates as well as the increased attention paid in the media to the environmental, social and governance (ESG) performance of corporations have led an increasing number of asset managers to become interested in incorporating ESG information into their valuation models of companies. One of the biggest needs to make this incorporation successful is reliable, neutral and objective information on the ESG performance of companies that allows for the impact of various ESG factors to be carefully analysed and understood.
Inconsistency
There are several challenges in ESG data that make the need for a standardised and organised information source particularly important for investors. First, partly because reports are both voluntary and often unaudited, company reporting standards differ dramatically (the figure provides a brief example of the variety of reporting guidelines that exist). Companies use very different units in reporting their ESG performance,
often reporting only for a portion rather than all company facilities, and sometimes providing ESG data in the form of ratios or in charts or in graphical form without providing absolute numeric values.
To read the complete article, click here.
Tracking Corporations’ Human Rights Performance Through Objective ESG Data
from ICCR, The Corporate Examiner, Vol. 36, No. 4-5, January 2009
Evaluating companies’ performance with regard to human rights poses several challenges. It is important to examine the policies they claim to uphold and use independent sources to evaluate their track records. A single judgment of company performance isn't adequate; there are too many standards and varying stakeholder and investor interests for one analysis to suffice. That's why analysts interested in monitoring corporate human right performance increasingly seek objective information from both company and independent sources. That way, they can make accurate assessments based on specific criteria.
To read the complete article written by Christopher Greenwald, ASSET4 Director of Data Content and Eve Morelli, ASSET4 Client Service Executive in English, please click here.
New Study Examines How Pension Funds Are Contributing to Sustainability Investing
In conjunction with the German Federal Environment Ministry, ASSET4 has commissioned a study of leading European Pension Funds on the issue of long-term and sustainable investments. The study was conducted by Dr. Axel Hesse, a leading consultant in the area of Sustainable Development Management.
The study found that while leading pension funds are clearly long-term investors, most investors in the financial markets act in a too short-term manner, for example with a maximum horizon of 2 years. Respondents also agreed that pension funds are currently making insufficient use of research with a long-term orientation. They expect that focusing on industry-specific KPIs and sustainability research integration into mainstream research will most likely to lead to long-term, risk-adjusted outperformance, whereas approaches that are too broad are more likely to lead to underperformance.
To read a summary of the highlights, please click here.
To read the complete study in English, please click here.
To read the complete study in German, please click here.
Carbon Emissions and Their Possible Impact on the Utilities Sector
When examining carbon emissions across a sector, it is helpful to visualise the information in a variety of ways in order to produce some very interesting comparisons that may be useful in evaluating corporate performance. In the example to the right, we focused on the Utilities sector and used the assetmasterProfessional™ Excel Add-In to import the carbon emissions data from companies directly into an Excel spreadsheet from which we generated the graph.
To view this and other graphs on this sector, click here.
ASSET4 Equity Performance Study
Significant correlation between good corporate governance and equity performance
Since the end of the 1990s, investor interest has been directed increasingly at corporate governance. What has prompted this interest is not so much management misconduct as the realization on the part of many institutional investors that, given the rules of incorporation and the volume of invested assets under management, the value of their portfolios can only be enhanced by means of direct and intense influence on the development of the individual companies. Particular emphasis has since been given to matters of corporate governance, although until very recently no direct connection could be established between corporate governance and share price movements. However, this connection has now been established by a study which furnishes empirical evidence of a significant correlation between good corporate governance and equity performance.
To read more about this ASSET4 study, you can download a copy of the study.