40 ESG, IMPACT INVESTING & SDGs
Can ESG data help generate Alpha? ESG alone may not necessarily be a way to generate Alpha, but certain metrics that are based on ESG criteria may be useful in identifying outperformers. By Gerald Cartigny
When discussing the subject of Environmental, Social and Governance factors, the conversation often turns to a widely held belief: that one has to give up returns to have a positive impact. We believe this is no longer the case. In fact, data shows us the opposite, namely that ESG considerations play an important role in identifying attractive investments and even in generating Alpha. ESG in Quant Goldman Sachs Asset Management’s Quantitative Investment Strategies (QIS) team manages equity portfolios using data-driven investment models that aim to objectively evaluate public companies globally through fundamentally based and economically motivated investment themes. At its core, the investment philosophy is grounded in identifying highquality businesses with attractive valuations that are exposed to positive sentiment in the market and are beneficiaries of global economic trends. NUMMER 4 | 2021
The QIS stock selection model, referred to as the Alpha Model, seeks to evaluate companies on the aforementioned investment themes and identifies those that, in our view, have the highest relative return potential. The investment horizon for our Alpha Model is approximately six to twelve months and balances risk/return forecasts in addition to moderating tracking error in its stock selection decisions. Several hundred unique signals are employed across four investment themes to form holistic views on stocks and make balanced investment decisions. In terms of ESG considerations, they found that certain signals rooted in sustainable investment ideas and data sets have attractive medium-term return profiles and are therefore incorporated within the four investment pillars of the Alpha Model. Historically, most of the ESG-related signals in our Alpha Model, as well as most other criteria in our models, utilized large sets of traditional company-speci-
fic data like publicly available financial statements and stock price information. For example, as part of our High-Quality Business Models investment theme, we have long used accounting information to quantify the extent to which we believe a company is well governed. We assess this by looking at the actions of company management (such as their financing decisions, capital
treatment etcetera) or by looking at the impact of those decisions on the health of a company’s balance sheet. Over time, our approach evolved to incorporate more nuanced and sometimes alternative data to help us gain an informational advantage and make more informed decisions. For example, we analyse the extent to which a company’s top management owns sha-
FIGURE 1: THE ALPHA MODEL
Fundamental Mispricings
High-Quality Business Models
Sentiment Analysis
Themes and Trends
Short to medium-term investment horizon Source: GSAM, 2021
Alpha Model
ILLUSTRATION: SHUTTERSTOCK
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