Over the past four decades, the benefits of integrating ESG factors into investment decisions has become more apparent. In previous decades, the resources to quantify ESG data was unavailable and many asset owners were quick to disregard the value of ESG. However, with the growing technology, we are able to extract data that can be used to gauge corporate activity and develop a more dynamic image of a company. With the more accessible resources on ESG, managers are starting to see the benefits of adding ESG into their asset allocation. This not only benefits the asset owners for creating opportunity but creates major concern for those that are not taking ESG into consideration. This risk goes beyond what is found in company reports, independent research and mainstream media.
Take into consideration a study conducted by Hedges & Olkin in 2015 where over 60% of the studies found positive correlation between ESG consideration and corporate financial performance. The following were meta-studies which have a statistical significance when taking into account their accuracy. Beyond the positive correlation, the Hedges & Olkin study found only 10% of the studies had a negative correlation with ESG considerations. Findings similar to this study are beginning to shift the perspective on ESG investments and attract asset managers to integrate ESG in their stock selection process.
Barclays saw a potential opportunity in taking ESG issues into consideration. Conducting a study back in 2016 of October where they used two different datasets over a seven year period to see how portfolios that took many ESG considerations compare to those with very little ESG considerations. Their results from the two datasets not only showed that there was no increase in risk for the portfolios that took ESG issues into high consideration, but also an increase in basis points by 29 in one dataset and 42 basis points in another. With the amount of information that is continually becoming available in this decade is continuing to create a wider picture of corporate activities both for risk and opportunity. Ignoring ESG yields an incomplete company portfolio leading to missed financial opportunities.
For example, in today’s social media frenzy, corporate reputation is a driving factor of financial performance. When you consider acts of wrongfully considered governance, companies can see losses within hours. Take into consideration what happened with United Airlines in April 2017. The company faced a drop of 4% creating losses of more than a billion dollars from a terrible mishandling of a passenger. Reputational damage is common and typically due to governance oversight and thus serves as one of the big predictors for corporate performance. Having a robust and historic governance profile on companies allows for asset owners to control that risk.
Furthermore, the Hedges & Olkin study also revealed that out of E, S & G, governance had the highest effect on positive correlations. Having a positive correlation for governance factors can lead to understanding why taking ESG into account rather than SRI investing is important. SRI investing is based on social and environmental values and beliefs. These two types of investing methods have their similarities but SRI often denies governance factors. In an environment where clarity is needed, avoiding company factors that have an impact on the financial results could lead to having major risks built into asset managers’ portfolio.
Why has this occurred? Studies have indicated the community of millenials has caused a major push for impactful investing. Millennials are becoming the majority in the workforce and are wanting to work for companies that have a sense of purpose, are doing good for the world and creating positive work environments. Studies by the TIAA have also shown 90% of affluent millennials are looking to invest in these various companies that are willing to report on their governance standards, their positive impact on the environment, along with social standards like the employee health and safety standards. In order to gain a competitive edge on others in the field, asset managers will find it incredibly valuable being able to view risks and opportunities to make financial decisions accordingly. Currently, an ESG standard is not concrete and this is where Harmony comes in.
We aim to set the standard and using machine intelligence, we can extract dark data and analyze them into usable information for asset managers.