Friday 05 July 2019
Quantative Equities - ESG: Yes We Quant!
Why are you turning towards ESG in your quantatibe equity range?
Integrating environmental, social and governancechallenges is key in our development strategy. Inaccordance with Groupe Amundi’s ambitions, we continueto steer towards 100% ESG in all our strategies by the endof 2021.
Nowadays, financial stability cannot be divorced from acommitment to sustainability, and we have a responsibilityin selecting investments for our portfolios. Applying our multi-factor stock-picking approach to an ESGuniverse by risks gives us better control over all facetsof our portfolios’ risk-reward. Hence, we are taking ESG challenges on board without altering the targeted returns of each of our funds.
We are confident that there exists a correlation betweenESG and companies’ long-term operating performanceand that ESG will therefore become an undeniable sourceof added value. This conviction is refl ected in growinginterest from our retail and institutional clients, for whom sustainable investment is becoming standard practice oreven a priority.
Naturally, we have extended our ESG approach to ourentire historical quantitative equity range, with its sixmulti-factor portfolios in the CPR Actions France, CPREurope, CPR Euroland, CPR USA, CPR Japan et CPR GlobalEquity ESG.
How is the ESG universer determined?
All ESG ratings (both quantitative and qualitative) that we use are supplied by Amundi’s extra-financial research staff. Each month, we meet with them to review changes in their ratings in our clients’ investment universe, based on extra-fi nancial data from external providers, including MSCI, Vigeo, ISS, and Eokom for ESG notes, RepRisk and Factiva for controversies, and Ethics for cluster bombs. Itis on this basis that we apply our risk-based ESG approach.
To lay out the contours of our investment universe weexclude the lowest-rated shares at two levels in order tolimit ESG risk in portfolios.
• The first level consists in excluding companies withthe lowest global ESG rating, which is a weightedaverage of 15 extra-financial criteria common to allsectors, plus 21 that are specific to certain sectors.
• The second level of exclusion from this pre-screeneduniverse involves the lowest-rated companies whilethis time factoring in a selection of fi ve ESG criteria(the most “material” ones) from among the 15 thatare in common with all sectors and that relate toeach individual region, i.e., the US, Japan, Europe, Asia, and Emerging Markets. This regional view ofESG practices is in accordance with our wish to take into account the various regulations and culturessurrounding sustainable investment.Our (absolute) exclusion methodology helps up to obtaina homogenous ESG investment universe for both equityor credit universes, while allowing for regional features.Here’s one example close to home: imagine having tosweat out a meeting with a Japanese company because theair-conditioning is being kept at 26° to reduce energy use,and then, after the meeting, popping out to a little place around the corner that serves whale meat for lunch…
How are securities selected in the ESG universe?
Within our investable universe, we select securities in two different ways, based on whether the market is Stressed or non-Stressed. A stressed market is one on which there have been concomitant tensions on both equity and credit markets in the past year.When the market is stressed, our multi-factor stock picking strategy is defensive, with factors such as volatility, dividend payout, or balance sheet solidity.When the market is Non-Stressed, our strategy is aggressive, with factors such as valuation, return one quity, or revenue growth.We therefore have a flexible approach that adjusts to each market paradigm. These paradigms are relatively stable over time, and our indicator is “strategic” and not “tactic”. The goal is to avoid trouble-spots and protectrelative performance during the most volatile phases andthus to control the risk of underperformance. All shares in our investment universe are exposed to various selection factors to vary degrees, depending on their profile.
How have you adjusted your reporting ?
Not only have we adjusted our reporting on the value ofour risk-based ESG approach and on how it works, we havealso developed an additional ESG report to go with our traditional performance report on the Quantitative ESG range. In addition to performances, traditional reports on sectorand geographical exposures, and fund events during themonth, our ESG reporting breaks down as follows:
• The total percentage of stocks excluded from theindex and the contribution of fi ve material criteria inthe fund’s region;
• The overall average rating of the portfolio and of itsbenchmark index;• The carbon footprint and other carbon data ofthe portfolio and its benchmark, in accordance with Article 173, which we have set up for all our Quantitative Equity funds, regardless of AuM.
Date of publication : 5 July 2019
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By Cyrille Collet, Head of Quantative Equity, and Thomas Chavet, Investment Specialist at CPR AM
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