ESG investing—the consideration of environmental, social
and governance (ESG) factors and how they impact an
investment—has been gaining traction with investors over the
last few years. Even as capital pours into ESG investing, data
and understanding in this area remain incomplete and opaque, which is
good news for investors seeking competitive market returns.
Most Cayman captives are US dollar-denominated and managed
according to conservative investment mandates (ie, they primarily
hold high-priced, low-yielding US dollar-denominated bonds). An ESG
overlay in the equity portion of captive investments of the captive’s
portfolio may complement the conservative nature of the captive’s
overall investments as it will increase diversification, mitigate risk and
may improve the portfolio’s risk-adjusted returns.
These are the key conclusions drawn from RBC Global Asset
Management’s (GAM) October 2016 survey of ESG asset owners,
wealth managers and consultants, Near-Term Uncertainty, Long-Term
Opportunity: RBC Global Asset Management Responsible Investing
Survey Report. The survey reveals lingering uncertainty about responsible
investing’s ability to drive financial performance and mitigate portfolio risk.
It also indicates frustration with the lack of corporate ESG disclosures,
and points to evolving expectations for both investing strategies and
portfolio managers. As a portfolio manager who leads an investment
team here in Cayman, I appreciate ESG’s importance and have
incorporated this aspect into many of our client portfolios as a result.
Alpha uncertainties and data dissatisfaction
In perhaps the survey’s most surprising revelation, less than onethird
(30 percent) of respondents considered ESG investing a source
of alpha, despite a growing body of research concluding that various
responsible-investing factors actually improve financial returns (Figure
1). A 2015 MSCI Research Insight, Can ESG Add Alpha? found that
portfolios with an ESG bias outperformed a world stock index, made
up of over 1,500 large-cap equities, over an eight-year period. Specific
factors valued by ESG investors have also been proved to correlate with
higher long-term returns.
Figure 1: Do you think of ESG as an alpha source?
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