QuantFin’s Post

Material ESG Alpha: A Fundamentals-Based Perspective

"ESG is beyond redemption: may it RIP" This is a great article because it is #provoking and starts conversations. There is a lot to unpack here and without trustworthy data, it is difficult to come to specific and complete conclusions. But again, the value is the conversations it initiates and the new trajectory that emerges. Has there been benefits from actions driven by different ESG initiatives over the past decade? Yes. Are there broken parts of the ever-evolving ESG motions, regulations, investment requirements, etc.? Yes. Is it time to, as the author suggests, kill ESG? "Here is where you can comment" All great challenges do not get solved on the first, second, or potentially the hundredth iteration. There is an iterative process including learnings and adjustments along the journey. The direction of ESG is correct and by having constructive conversations, with real data, adjustments can be made for the next phase of the evolution. My perspective is that meaningful change and impact will come from shifting to a bottoms-up philosophy. Where SMBs and enterprises will operate with #purpose and #values that hold a definition of business-generated value that broadens to include; conventional economics plus social and environmental economics. It won't be for the faint of heart and, as we have learned, defining how to measure these variables will be critically important for success.

discussion on Sustainable Finance and ESG Analysis: 🌱 Embracing Sustainability: Exploring ESG Analysis in Financial Decision-Making 🌍 In today's evolving financial landscape, integrating Environmental, Social, and Governance (ESG) factors into decision-making has taken center stage. ESG analysis goes beyond traditional financial metrics, offering a holistic view of a company's impact on both its bottom line and the world around it. What is ESG? Environmental (E): Considerations like carbon footprint, resource usage, and waste management. Social (S): Aspects such as employee well-being, diversity, community engagement, and customer relations. Governance (G): Factors like leadership quality, ethical practices, and transparency in decision-making. The ESG Advantage: Combining ESG analysis with financial assessment enhances our understanding of a company's long-term prospects and vulnerabilities. It doesn't replace traditional financial analysis but enriches it, revealing how sustainability practices influence risk mitigation, operational efficiency, and stakeholder relations. Impact on Investment: Sustainable finance has given rise to conscious investing. Investors are seeking out companies aligned with their values and ethical practices. As financial professionals, integrating ESG considerations can inform investment decisions, adding depth to portfolio management strategies. Challenges and Opportunities: While the adoption of ESG analysis is growing, challenges like data consistency and regulatory compliance persist. However, these challenges also present opportunities for innovation, collaboration, and more comprehensive reporting. Navigating the Future: ESG analysis is not just about ticking boxes; it's a reflection of evolving stakeholder expectations. As professionals in financial analysis, we have the chance to steer our decisions towards a more sustainable and responsible future. Let's embrace the transformative power of Sustainable Finance and ESG Analysis in shaping a resilient and prosperous global economy. 🚀🌿 #Sustainability #ESG #FinancialAnalysis #SustainableFinance

Fascinating story on the exodus of capital from "sustainable" and "ESG" funds. The reason isn't complicated: many of the funds were opportunistic and not based on sound modeling & analysis. 💡 There has long been an interest in socially responsible investing and corporate social responsibility. The label has just changed over time. And what's especially concerning is that the metrics, as far as I can tell, haven't improved. If anything, metrics around ESG deteriorated because of the proliferation of approaches to game the data. That's what Florian Berg et al explained in their landmark Review of Finance article, highlighting how ESG ratings agencies exhibit vast discrepancies in their scores for companies. My research with Majeed Simaan, Ph.D., FRM - link in comments - shows that incorporating ESG metrics in a portfolio selection model actually generates worse ESG and return results than not using the scores. That's because adding noisy measures in creates a moving target. We need to pay attention to what we're modeling and not just take the guise of data at face value. Alex Edmans recently produced a seminal book explaining this in #MayContainLies with examples and recommendations.

My appetite for the book Valuation and Sustainability was insatiable it proved nearly impossible to put it done. The drive to get more had me feeling like Gordon Gecko when he uttered the words: "Money never Sleeps", with me complementing the sentence by saying "it merely lies dormant" - with me referring to information instead of money. One of the authors did a remarkable job of putting ESG concepts into contemporary use, paving the way to the brilliant implementation of Agenda 2030. Matthieu touches on Scoring Models powered by algorithms developed by finance professionals to aggregate raw environmental, social and governance data that can support investment decisions along with financial analysis - something that creates a growing need to develop effective sustainable finance indicators. To see how deep we are in our efforts to make progress for example, he tells us how FTSE provides estimates of companies' green revenues, or the share of their revenues derived from products and services that provide environmental solutions. I still sense trial and error in the development of these ESG indicators, but the writing is already on the wall for most industries. Scores are normally based on two elements: •Information about the policies of the company offering the financial product, such as reports from these companies on the processes and strategies they use to integrate sustainability issues into their activities. •Sustainable metrics aggregated into a few scores, most of the time targeting the ESG pillars (pictured). In this spirit, calculating the average sustainability characteristics of an investment products' holdings is somewhat like calculating the average return of an investment product. The rapidly shifting scientific state of the art in sustainable finance and ESG rating industry is undeniable evidence that the world is now migrating to a green economy. Morningstar, Sustainalytics and MSCI are all rating methodologies keeping up with the latest scientific and market trends. This book is packed with atomic information and it would be quite an investment to have it on your desk as reference.

We are becoming the change we need to see in the world... Public and private companies are embracing what's needed to save our planet, species & humanity 🌎 www.avilacreativeinc.com #ESG #ESGreporting #sustainabilitymatters

I am thrilled to share our research paper on SSRN titled "Exploring the link between ESG Ratings and Financial Performance: A Sector-by-Sector Analysis," co-authored with Léna TUVACHE and Anthony Schrapffer, PhD.   🔍 In this study, we examine the relationship between ESG (Environmental, Social, and Governance) factors and financial performance across different industry sectors. Our analysis covers a decade, from 2012 to 2022, and includes data from 1 298 international firms.   📈 Using Spearman's rank correlation coefficient, we've uncovered how the connection between ESG scores and financial metrics varies across industries.   📊 The paper reveals that credit-based variables are more linked to the ESG score than market-based variables.   A huge thank you to Léna for her valuable dedication and teamwork, and to Anthony for his precious advice and guidance throughout this project. 🌱 This paper highlights the importance of sector-specific analysis in integrating ESG considerations into investment strategies. We hope our work contributes to the evolving conversation on sustainable and responsible investing.   📚 You can access our full paper here: https://lnkd.in/eKfiW5f3     #ESG #SustainableFinance #FinancialPerformance #Research #IndustryAnalysis #InvestmentStrategies

I found this article unbelievably biased and misleading. In this FT article, Damodaran - a real guru of valuations - tries every possible argument to destroy ESG. He even proposes a surreal syllogism: 1. ESG is about de-risking an asset 2. 'If an asset is less risky, it should have lower expected returns.' 3. ESG lowers the the expected return of an asset While 1 and 2 are correct on their own, 3 is an obviously misleading and illogical link. The risk/return ratio is driven by uncertainty in market conditions and price volatility. ESG is a completely different thing. It's about compliance, operational resilience and access to capital. Even the most 'risky/high return asset' in the world wants to be aligned with the law, strengthen its value chain and get cheaper money. There are many problems with ESG - which is why in the early days of 51toCarbonZero we chose to stay away from it - but the arguments in this article are highly misleading, in my view. Surprised to see them coming from the pen of such a great author and published on such a prestigious newspaper. https://lnkd.in/e4HUAcXz

In today's business landscape, #ESG indicators have become increasingly important for companies. Evaluating a company's #environmental, #social, and #governance (ESG) performance is now integral to financial assessments. These #ESG metrics provide valuable insights into how well a company manages its sustainable practices and governance, impacting investor confidence and the potential for future growth. Ultimately, these assessments can influence stock prices as investors prioritise companies with strong ESG profiles. https://lnkd.in/dGfC_9zx

Last week I had the privilege of participating in a thought-provoking panel discussion on the "ESG Data Dilemma, Trends in ESG, and the Ideal ESG Landscape in 5-10 Years" @Outvie Sustainable Finance & Climate Risk Event.   ESG (Environmental, Social, and Governance) factors are becoming increasingly important in the world of finance and business. They're not just buzzwords; they're driving real change and reshaping the future of sustainable finance.   Here are some key takeaways from our discussion: 1️⃣ **ESG Data Dilemma:** We delved into the challenges of collecting, analyzing, and interpreting ESG data. The dilemma lies in ensuring data accuracy, relevance, and comparability across industries, which is crucial for informed decision-making. Data gaps or inconsistencies should not withhold you from not acting.   2️⃣ **Trends in ESG:** We explored current ESG trends, including the rise of impact investing, the importance of supply chain transparency, and the role of technology in ESG reporting and assessment.   3️⃣ **The Ideal ESG Landscape:** We envisioned what the ESG landscape might look like in 5-10 years. It's a future where ESG considerations are seamlessly integrated into business strategies (and teams), regulatory frameworks are harmonized globally, and investors have access to reliable ESG data.   As we strive toward a more sustainable future, the finance industry's role in driving positive change is undeniable. I'm excited to be a part of this conversation and contribute to shaping the future of sustainable finance! 🚀     #SET Ventures #ESG #SustainableFinance