Factor investors increase ESG integration for performance upside

'If you are the only one who is not looking at ESG it is quite likely you will underperform', finds Invesco research

Factor investors’ motivations for incorporating ESG have changed since last year, with more investing for its potential to bring better long-term performance than because it is an area in high demand, according to research by Invesco.

Speaking about the report Invesco Global Factor Investing Study 2021, Georg Elsaesser, senior portfolio manager, quantitative strategies at Invesco, shared why he believes motivations have changed: “If everyone is moving toward ESG eventually we will come to a point where the whole market is ESG.

“Even if you are not convinced that ESG gives you better performance you are well advised to consider ESG from a risk perspective. Because if you are the only one who is not looking at ESG it is quite likely that you will underperform,” said Elsaesser.

On the whole, the global fund group found ESG is increasingly being incorporated in to factor methodology – which is typically a balance of value, quality and momentum factors.  

After interviews with 241 factor investors around the world responsible for managing over $31trn in assets, Invesco found 78% incorporated ESG in their portfolios and 43% had increased allocations to factor investing in the last year.

Elsaesser said ESG investors were being “pushed” to factor-based investment strategies because it makes it possible to move from one portfolio to another while incorporating ESG and maintaining the same factor exposure. Meanwhile, he said, the ESG incorporation itself may lead to better performance or reduce overall risk.

Fixed income

Elsewhere in the report, Invesco found of the roughly two fifths of respondents who analysed whether ESG had created a factor bias in their portfolio, nearly two thirds found a bias.

Invesco also found the number of investors using factors in fixed income has increased from 40% last year to 55% this year.

According to Elsaesser, in fixed income, ESG means a quality bias towards lower yielding securities.

“You can re-establish that by adding certain factors like value and carry where you use good ESG bonds in the carry segment to re-establish your initial portfolio characteristics.

“Factor investing is on the rise anyway but if you look at it from an ESG point of view it has particularly great merits,” he said.