Study: When an alpha strategy is massively implemented, it becomes a beta strategy

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    Amundi’s new research on the impact of ESG investing on equity asset pricing finds that when an alpha strategy is massively implemented, it becomes a beta strategy.

    With the rising awareness around ESG issues worldwide, institutional investors have started to massively look into responsible investment. The latter has grown substantially in Europe and in North America in the past 5 years.

    In Europe, the massive mobilization of institutional investors regarding ESG investing has impacted demand mechanisms, with a subsequent effect on prices, thereby also triggering a performance premium.

    KEY FINDINGS

    The study focused on the period 2010-2017 and used Amundi’s proprietary ESG scores and Environmental, Social and Governance (E,S and G) sub-components to screen portfolios. The analysis was conducted for passive, active and multi-factor portfolios for Europe and North America, among others.

    Return profile

    1

     

    Between 2010-2013, being a responsible investor would have tended to penalize both active and passive European and North American portfolios. Between 2010-2013 only Environmental-focused passive investors in the Eurozone would have enjoyed outperformance, while effects of Governance-focused and Social-focused portfolios on performance were neutral or negative.

    2

     

    From 2014-2017, responsible investing was generally a source of outperformance in the Eurozone and North America. In the Eurozone, all pillars (Environmental, Social and Governance) and ESG score integration displayed positive returns, with the Governance pillar dominating. In North America, ESG investing during the 2014-2017 period also displayed positive returns, although the Environmental component is the largest winner.

    3

     

    Our study identifies several performance generation mechanisms, demonstrating that stock prices integrate ESG-related information at different levels. These mechanisms are dependent on the geographic region studied, the ESG focus, the ranking (best / worst-ranking or all gradients) and the period studied.

    Overall, in North America between 2014-2017

    (i) ESG-portfolios’ excess return increased with the ESG score;
    (ii) only best-in-class stocks were remunerated for Environmental-focused portfolios, and only since 2016 for Social-focused portfolios;(iii) and only worst-in-class stocks were penalized for Governance-focus portfolios.

    Similarly, in the Eurozone between 2014-2017

    (i) both best-in-class stocks were remunerated and worst-in-class stocks were penalized for ESG -and Governance- focused portfolios, and only since 2016 for Social-focused portfolios;
    (ii) and only best-in-class stocks were remunerated for Environmental-focused portfolios.

    Figure 1 – Overview of performance generation mechanisms per region and observation period

    2019-01-ESG-tab1