Exploring the relationship between performance and ESG alignment

Authors

Nasdaq for Asset Owners

Andres Ramos

Published

Oct 24, 2023 2:17PM EDT

Due diligence and ESG-focused funds

Successfully investing in ESG-focused funds, or asset managers that purport to use ESG factors in their investment processes requires just as much due diligence as any other investment in an allocator’s portfolio. Like any other asset class or strategy, there will be both strong performers and underperformers when it comes to asset managers incorporating ESG into their investment process.

To illustrate this, the chart below uses eVestment ESG Analytics to chart 1-YR performance for ESG-focused Global Equity products against their portfolio’s net alignment to UN Sustainable Development Goals (SDGs), measured as a trailing 12-month weighted revenue average. The green values represent products that do not use negative screens for emissions while the orange values represent the values that do employ negative screens.

1-YR Returns for Global Equity vs. SDG net portfolio alignment

Taking into account negative screening status, products are most heavily concentrated between 0% and 15% net alignment and 10% to 25% gross 1-YR returns. As you move right with greater net alignment, there are noticeably fewer products and a greater dispersion of return values along the Y-axis.

This dispersion and lack correlation between net alignment and performance suggests that neither negative screens nor SDG alignment come at the cost of performance for ESG-focused strategies. Identifying the top performers is still a matter of effective due diligence.

Evaluating ESG in Investment Programs

In the latest edition of the CIO Quarterly we focus on how asset owners can utilize ESG to evaluate risk and build successful investment programs. Read the CIO Quarterly for insights and perspectives on ESG, including the top performing ESG-focused strategies across equity and multi-asset strategies and consultant insights on different approaches allocators can take when implementing ESG.

Download the report here.