Home' Superfunds : Superfunds November 2014 Contents Superfunds November 2014
ussell recently completed research
exploring the relationship between
environmental, social and governance
(ESG) tilts and adding value through active
security selection. For active managers
selecting shares, these tilts are not typically
engineered, but are rather byproducts of
ESG-agnostic processes; that is, they are not
intentional. Ultimately, we found that ESG
tilting may indeed be consistent with adding
value, as active share managers typically
exhibit positive ESG tilts in their portfolios.
In our analysis, we discovered that global active
managers’ portfolios are tilted to ESG factors
even if such tilting is not managers’ explicit
intent. For super funds considering ESG issues, a
sound governance process – including practical
considerations about implementation options – is
AN ANALYSIS OF GLOBAL ACTIVE
Do managers in the active universes exhibit ESG
bias as they seek to add value over benchmarks?
With some $14.5 trillion of the invested assets
evaluated by the Global Sustainable Investment
Alliance (GSIA) now incorporating ESG analysis,
the integration of ESG considerations into active
portfolios seems to be gaining momentum.
If the naysayers correctly believe ESG is a
money-losing strategy, we should have found that
managers are biased against ESG. However, we
found some evidence of positive biases.
In order to provide a fair and reasonable
quantitative evaluation of a company’s ESG factor
exposure, we used environmental (E), social (S),
governance (G) and total ESG scores from an
independent third party, Sustainalytics.
From evaluating the distribution of active
managers’ ESG exposures, we found that these
portfolios have ESG tilts. We also found that
active managers’ portfolios were positively biased
toward higher ESG-scoring companies, or biased
against lower ESG scoring companies. We do not
suggest that the higher a security’s ESG score, the
more likely the manager is to hold or overweight.
Our assertion is simply that in examining average
tilts (while controlling for capitalisation biases),
we found that the active managers have tilts that
were previously neither measured nor noted.
Some steps companies can take, based on the
research findings, include:
1. Realise that active managers seeking
added value display positive bias to ESG
investments. Investors who are concerned
that ESG tilting might be value-eroding may
find it useful to know that the professional
active managers in Russell’s universes, who
are seeking to add value over a benchmark,
seem to have had positive tilts during this
2. Review your existing portfolio for ESG
characteristics. Those investors directly
managing active funds may find that they
have positive ESG tilts in their portfolios!
Moreover, there may be information in ESG
scores that might assist active managers in
the security selection process – information
that they are not yet explicitly considering.
3. Be inquisitive and actively monitor tilts.
Investors seeking a positive tilt toward ESG
factors in their portfolios may find that their
active products already have one.
WHAT DOES THIS MEAN FOR SUPER
Russell’s research indicates that Australian active
managers’ integration of ESG considerations into
investment portfolios has been high on a global
scale. Australia has also seen one of the highest
proportional uptake of signatories to the United
Nations’ Principles for Responsible Investment,
demonstrating that responsible investment
considerations are being made across a broad
range of asset managers and asset owners.
There has been much debate within
superannuation around the ‘sole purpose test’
and the fiduciary duty of trustees in considering
non-financial criteria, such as ESG, for their
investment strategies. This debate has been
perceived as an obstacle for the broader
integration of ESG factors in investment decisions
across Australia’s superannuation industry.
The interpretation of fiduciary duty is evolving
locally and globally though, with some guidance
from the Australian Prudential Regulatory
Authority (APRA) and 2006 findings by the
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