Investing For a New Decade
The next 10 years are sure to bring a different set of opportunities and obstacles than the past 10.
Environmental, social and governance (ESG) issues have become increasingly important to institutional investors. But there is no one-size-fits-all ESG solution. Nor is there a consensus around what constitutes best practices for sourcing ESG data.
At issue: investing strictly in ESG-friendly firms can result in a portfolio that trails non-ESG returns, which may conflict with investment managers’ fiduciary responsibilities. The ideal ESG approach would incorporate ESG considerations while maximizing long-term risk adjusted returns. QMA believes that a core-satellite framework could be successful in this regard.
The core-satellite approach allows investors to pair complementary ESG strategies. A core manager (such as QMA) could contribute controlled ESG exposure with risk control and stable performance, while a specialist manager could provide a stronger focus on ESG with potentially more variable performance. The combination of core and specialist managers may be more likely to deliver comprehensive investment performance and a stronger ESG outcome.
“We view the quantitative manager’s role as one of providing an objective, yet flexible data-driven perspective on ESG issues,” said Gavin Smith, Managing Director and Portfolio Manager at QMA. “We do so by carefully balancing our clients’ growing desire to invest responsibly with our goal to maximize their long-term, risk-adjusted returns.”
We also encourage companies to be more transparent about their ESG practices through participation in industry associations, effective lobbying, and other efforts, which seek to improve ESG stewardship on a wider level.
Investors will always have varying goals for their ESG portfolios. Our quantitative process allows us to adjust the ways in which we integrate ESG into portfolios and target different levels of active ESG exposure to produce varying levels of ESG investment for each client. Investors can then select the alpha and/or ESG exposure solution that best meets their needs. This can range from a moderate level of ESG exposure with additional expected alpha to a higher level of ESG exposure that offers expected returns more in line with their selected benchmark.
As demand for ESG investing continues to grow, more institutional investors will be forced to contend with the tricky balance of ESG issues and alpha capture. QMA’s core-satellite approach allows investors to choose their own level of ESG investment, so they can “do good while doing well.”
For Professional Investors only. Past performance is not a guarantee or a reliable indicator of future results. All investments involve risk including the possible loss of capital. The information represents the views and opinions of PGIM Fixed Income as of 12/20/2019, is for informational purposes only, and is subject to change. The information does not constitute investment advice and should not be used as the basis for an investment decision.