Is ESG Worth Investing In?

The way we invest is changing. It’s no longer just about the bottom line, about how much we can squeeze from a company, product or service before it stops being viable, or making money at the expense of all other considerations.

Sustainability is a topic that is on the lips of more and more investors, and it’s an important consideration, both when engaging in business and when looking for a sound investment. But what does sustainability really mean, and does it actually make a difference to investors and to the way we do business?

Why Sustainability Matters

Environmental, Social and Governance (ESG) considerations are about more than simply looking good to investors. Companies that spend the time and money making sure their operations have the lowest possible environmental impact, the highest possible social impact, and the most ethical and sustainable governance structures are, on average, doing better than those that don’t.

For example, if we look at French FinTech startup, Quantilia’s, sustainability reference basket over the last year, these indices have consistently outperformed the developed market equity index benchmark at 6.4% p.a. vs 3.6% p.a. But why is that the case?

Quite simply, it’s because sustainable business practices make sense, and investors understand that. While it is true that, in some cases, ignoring sustainability can increase profitability in the short term, any company that hopes to last more than a few short years needs to commit to sustainable practices if it wants to keep growing and making money for the next few, or several, decades.

No longer content to simply get in, make some money, and get out, boards of directors across the globe are recognising that investing in the future of both business and the world we live in is the sensible choice.

While some will argue that it’s a feel-good metric, and not a true consideration of hard-line value, others point out that there are various ways to consider ESG and sustainability factors, and many of them lead to real financial returns, as well as the social and environmental benefits that are reaped.

It is worth noting that, in the short term, ESG can underperform in the market from time to time, compared to certain other indices. For example, in the last three months, there has been a slight underperformance. That said, historically, it has recovered and performed well with lower volatility than these other indices. In fact, the current reduced performance is serving as an excellent test case for ESG indices’ resiliency.

ESG and Quantitative Indices

So, how do ESG and quantitative strategies link to one another, and how does this make for good investment decisions?

1 – Using ESG metrics in a smart beta index

ESG performance ratings and metrics lend themselves quite easily to inclusion in a QI-based strategy’s algorithm. Having the capacity to get facts and figures on specific environmental impacts – such as reduction in water use or emissions – or on social impacts – like investments into community upliftment – can provide the investor with quantifiable data.

2 – Following what the leaders are doing

Institutional investors, who are traditionally heavily invested in quantifiable indices, have also picked up on ESG over the last few years, recognising that this trend is more than a simple flash in the pan – it’s the direction all business must move in, and those getting in on it now are the ones who will likely outlast their competition and continue to pay investors returns for the long term.

3 – Who’s providing the indices

Add to this the growing availability of smart beta indices on the ESG theme, such as the Finvex Sustainable Efficient Europe 30 Index, and the SGX Sustainability Indices, and it’s clear to see that sustainability as a basis for investment isn’t going anywhere anytime soon. In fact, with the broad availability of these indices, it’s possible to build a strong, solid quantitative strategy that not only takes these indices into account, but is based on them.

Making ESG QI Easy

Since its launch just under one year ago, Quantilia has been actively tracking and providing institutional investors and family offices alike access to a wide variety of quantitative indices, including a robust and well-developed range of ESG indices. Quantilia is the quantitative index platform of reference, developing and providing institutional investors with accurate and reliable data and tools based on this business model and other quantitative indices that suit their clients’ unique needs and wants.

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