ESG integration is fast becoming mainstream with some of the world’s largest institutional investors allocating capital to dedicated ESG strategies in search for alpha. Growing data availability allows investors to quantify the risk and return ramifications unlike no other time in history. While there remains skepticism about performance implications, recent studies and our analysis indicate that ESG information may be used as an alpha enhancing signal. Rockefeller Asset Management (RAM) believes that investors will increasingly differentiate between ESG Leaders and ESG Improvers – those firms showing the greatest improvement in their ESG footprint – and that the latter offers a greater potential for generating uncorrelated alpha over the long-term. We recently tested this theory, which confirmed our belief and led to the creation of the Rockefeller ESG Improvers Score™ (REIS), a score that ranks a company’s improvement in performance on material ESG issues relative to industry peers.
In their paper “ESG Improvers: An Alpha Enhancing Factor”, RAM adds to the body of evidence demonstrating the risk and return prospects of ESG Improvers, an approach that isolates the trajectory of a firm’s ESG profile relative to industry peers. Moreover, in their research they isolated pure ESG Improvement, controlling for sector and factor biases in an optimized hypothetical ESG Improvers portfolio, and additionally tested the efficacy of integrating the ESG Improvers factor with traditional factors over the back-tested period.
RAM’s team has long used materiality and ESG Improvers concepts alongside our fundamental research process. They believe that the REIS research will continue to supplement their bottom-up research and idea generation process and that it has additional wide-reaching applications across other styles of investing, including long-short fundamental and quantitative styles. They are particularly excited about the opportunity for long-short investors to source short ideas from bottom quintile “decliners”.
Ultimately, through publishing their findings, it is our fervent intent to help advance the understanding and benefits of ESG integrated research. We look forward to discussing our research and its relevance across various investment strategies and approaches.
Rockefeller Capital Management is the marketing name of Rockefeller Capital Management L.P. and its affiliates. Investment advisory, asset management and fiduciary activities are performed by the following affiliates of Rockefeller Capital Management: Rockefeller & Co. LLC, Rockefeller Trust Company, N.A., The Rockefeller Trust Company (Delaware) and Rockefeller Financial LLC. Rockefeller Asset Management is a division of Rockefeller & Co. LLC, a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Rockefeller Financial LLC is a broker-dealer and investment adviser dually registered with the SEC; Member Financial Industry Regulatory Authority (FINRA); Securities Investor Protection Corporation (SIPC). The registrations and memberships above in no way imply that the SEC has endorsed the entities, products or services discussed herein.