Quoting oneself reveals a lack of imagination, but I’ll risk it: «We believe that responsible investments are important for achieving the best possible risk-adjusted return for our unitholders and customers. Sustainability and sound corporate governance give companies competitive advantages and contribute to longterm value creation.”
As part of our responsible investment process, we exclude companies on the exclusion list of the Norwegian Government Pension Fund Global. Last year, three researchers from the Business School at the University of Stavanger examined these exclusions and found that an equally weighted portfolio of all excluded stocks throughout the 2005-2022 period had a statistically significant alpha (adjusted excess return) of a surprising magnitude.
In other words, the excluded stocks did a lot better. And these are excluded from our investment universe as well. Are we sacrificing returns after all? And if so, why do we keep at it?
“It’s not just about returns. It’s about risk-adjusted returns. ”
First, let me remind you that high ESG quality is but one of many attribute sets that we evaluate before investing. It is a necessary, but certainly not sufficient condition. If, for instance, we find that the valuation multiples indicate lower expected returns, we will not be tempted. After all, this is active management. And, if you will excuse a bit of boasting, we have a history to prove it; our aggregate excess return runs in the billions (in NOK).
Second, such academic studies adjust their measured returns by factors that are known to provide excess returns. If a momentum stock outperforms its benchmark index, it may not register as excess return simply because momentum stocks “should” outperform in the first place.
Third, it’s not just about returns. It’s about risk-adjusted returns. Our clients care about risk, so we care about the risk in their portfolios. The relevant risk is more than the standard statistical measures of risk.
Fourth, please remember that we have a decidedly long-term perspective. And in the very long term, a lot of what passes as “green” may also turn out to be a strong competitive advantage. Lower emissions? Will be a sure advantage as the price of emissions allowances in the EU and UK creeps higher. Energy-saving products? Likely to face increased demand. Access to clean energy? A sure advantage already, but not likely to become less salient. We don’t think that the “unchanged earnings” assumption holds in the long run.
In my opinion, there’s no getting around the need to analyse each and every company thoroughly. Blindly following an index will expose you to lower ESG quality and higher risk. Blindly following ESG ratings will expose you to high-priced stocks with a higher financial risk.
So, we’ll keep at it. We’ll keep integrating sustainability concerns in our investment process. And we do believe that we’ll keep delivering excess returns, both financial and risk-adjusted.
