Eurozone outperforms North America in ESG investing, says Amundi research


The Eurozone is outperforming North America when it comes to ESG investing, according to new research by Amundi, although passive and active ESG investors on both sides of the pond have seen a positive impact on portfolio performance since 2014.

The purpose of the new research was to determine whether being an ESG investor had an impact on portfolio performance between January 2018 to June 2019 and the findings update the inaugural seminal paper which was published last year.

Following growing demand for ESG investing from institutional clients worldwide, Amundi used data from 2018-2019 to analyse the performance of 1,700 companies across five investment universes, corresponding to MSCI indices: MSCI North America, MSCI EMU, MSCI Europe-ex EMU, MSCI Japan and MSCI World.

Amundi says the research confirmed the findings in its original paper, noting that ESG investing tended to penalise ESG investors between 2010 and 2013, but rewarded ESG investors after 2014, both passive and active. However, over the last 18 months, new trends have emerged.
In North America, the company noticed a decrease in alpha generation on all dimensions, and even a loss on the Environmental pillar, whereas in the Eurozone, the same positive dynamic still operates, with the Environmental and the Social pillars outperforming. For example, buying the best-in-class (or 20 per cent best-ranked) ESG stocks and selling the worst-in-class (or 20 per cent worst-ranked) ESG stocks would have generated an annualised return of 5.8 per cent in the Eurozone, but only 0.6 per cent in North America (versus 6.6. per cent and 3.3 per cent for the 2014-2017 period).

Amundi writes: “In our previous paper, we found that the Social pillar’s integration lagged compared to Environmental and Governance between 2010 and 2017. However, since 2018, Social is now the best performing pillar. We found that when a portfolio took a long position in the 20 per cent best-ranked stocks and a short in the 20 per cent worst-ranked stocks, this contributed to an annualised return of 2.9 per cent in the Eurozone and 1.6 per cent in North America. Similarly, optimised index management, in which the weighting of companies in the index is optimised to obtain the lowest possible tracking error, would have created an excess return of about 60 and 40 basis points in the Eurozone and North America for a tracking error of 50 bps. We believe this was helped by more sustainable investors exploring the latest trends in ESG investing and a greater interest in Social themes.

“Our study shows that ESG investing goes beyond the exclusion of worst-in-class stocks or the selection of best-in-class stocks. We found that the increasing relationship between ESG ranking and performance is sometimes affected by the behaviour of second-to-worst* in class stocks. We hypothesise the abnormal performance of these stocks is due to the development of forward-looking strategies, with some investors betting on improving companies instead of well-scored companies. We argue that the emergence of ESG momentum strategies and the shift towards a dynamic view of ESG ratings are a positive development, as it reinforces the complexity of ESG integration. This demonstrates that sustainable investors might better understand underlying issues and are moving beyond a binary black and white view of corporations.”
Thierry Roncalli, Head of Quantitative Research at Amudi, says: “As a responsible investor, we continually monitor ESG investing dynamics to ensure that we are well-positioned to meet the needs of our clients. Our new research indicates that ESG investing continues to offer value, but is becoming more mature with divergent trends across geographies, investment strategies and the three themes of E,S and G.”
Vincent Mortier, Group Deputy CIO, says: “The complexity and diversity of responsible investing means investors must be agile and willing to respond to new themes and drivers. We have found that over the last 10 years, investor mobilisation and awareness has meant that the consideration of ESG factors has gone from a ‘nice to have’ to a ‘must have’”.