A study by BlackRock found a disconcerting connection between ESG performance and returns, the Financial Times recently reported.
“Companies that aim to do good for society by adhering to environmental, social and governance policies are more likely to encounter lawsuits and regulatory actions, says BlackRock.”
The FT report identifies a key problem with some ESG investing approaches and datasets: scores by ESG ratings firms are a reductive approach to the wealth of information represented by ESG events, and those ratings tend to be lagging in time.
Instead, many investment professionals prefer timely ESG data, and consider the direction of performance important. Truvalue Labs’ Insight360 platform was built to show that trajectory, which we call ESG Momentum.
Eoin Murray, head of investment at Hermes, the £30bn London asset manager, says screening companies based on ESG metrics alone is an unreliable way to avoid controversies.
“Investors have to take a deeper dive into a company to find out the stories behind the numbers,” says Mr Murray. He also notes that some of the databases that monitor ESG issues tend to lag behind in the speed and timeliness of important information, which can have an influence on the decisions of portfolio managers.
“Improvements in governance scores are a significant factor in producing superior returns. Investors should always look for evidence of improvement as it is the change in ESG metrics that is the key,” says Mr Murray.
The latter observation by Hermes’ Murray hits on a key point: ESG performance can change over time, and improving or worsening performance is valid to today’s investment valuations for the same reason that improving or declining balance sheet fundamentals would be.
So how does ESG Momentum work in practice?
One way to screen company performance on the Insight360 platform is by industry: below, you can see the Industries page, where industry performance is sortable by the long-term Insight score, by ESG Momentum, which indicates the trajectory of performance, or by the short-term Pulse score.
As you can see above, the Biofuels Industry is the top-ranking industry in the ESG Momentum category, when you filter data using the SASB Materiality standards.
Within the industry Biofuels you can sort how companies rank for ESG Momentum, either positively, or negatively, as is seen below.
Other sorting options include long-term Insight Score, and short-term Pulse Score.
Within a portfolio, you can screen for ESG Momentum among a cohort of companies you’re invested in, or are screening for potential investment.
The portfolio screen on Truvalue Labs’ platform offers the added benefit of a heat map view that groups high-performing to low performing companies for long-term score along one axis, and high-to-low performing companies for Momentum along another.
The top right quadrant, where green dots are seen, is home to the best ranked companies with the best momentum.