Case study by Auriel Capital

Our quantitative strategy is centred on long-term forecasts derived from ESG factors. These long-term views are complemented by shorter-term, tactical trading programmes designed to protect the long-term positions from adverse, short-term price movements. They do this by utilising behavioural insights at and around firms’ earnings announcements, and the natural tendency of stock prices to revert to mean over time.

Our attribution analysis involves measuring and analysing the return contributions of the portfolio’s four underlying trading books (ESG, Earnings forecasts, Pattern of analysts’ revisions and Mean-reversion), which contain positions in line with our long-term ESG views and tactical trading programmes. Similar to an in-house, multi-manager programme, trades from each trading book are submitted separately, allowing us to identify which effects are coming from which trading books. Trades are then netted and executed centrally to manage risk correlations across the trading books.

The analysis shows that ESG factors have added about 65bps per year to our fund’s return (see first table below) and about 32bps per year to fund volatility, since going live in August 2010. (Volatility was calculated by taking the difference between the ex-post volatility with and without the ESG trading book). 

 ESG Earnings forcasts Pattern of analysts’ revisions Mean-reversion Totals 
Australia  0.0%  -0.9%  0.6%  0.4%  0.1% 
Canada  0.8%  -0.4%  0.8%  1.0%  2.2% 
Europe  1.1%  1.7%  2.5%  1.5%  6.8% 
Nordic  0.7%  2.0%  0.9%  0.6%  4.1% 
Japan  0.9%  -0.5%  1.0%  0.5%  1.9% 
United Kingdom  0.1%  3.3%  1.0%  0.6%  4.9% 
Totals  3.6%  5.1%  6.8%  4.6%   

We then examine the return contributions of the 27 proprietary indicators within our ESG trading book. We categorise the indicators as either environmental, social or governance indicators, and sum the return contributions for each of the six regions to arrive at the table shown below showing that governance factors play the biggest role, followed by environmental, with minimal though still positive impact from social factors.

 Environmental Social Governance 
Australia  0.2%  0.0%  -0.2% 
Canada  -0.5%  0.3%  1.0% 
Europe  0.6%  -0.1%  0.6% 
Nordic  0.4%  -0.2%  0.4% 
Japan  0.5%  -0.3%  0.6% 
United Kingdom  0.1%  0.2%  -0.2% 
Totals  1.4%  0.03% 2.2% 

Download the full report

  • Download report

    A practical guide to ESG integration for equity investing

    September 2016