Factor Spotlight
Factor University

An ESG Assessment of Asset Owner “X”

This week we are taking the reins of Factor Spotlight to address ESG from a different lens, that of the Asset Owner or investment allocator as opposed to the investment manager.

Historically, the asset management community deployed qualitative approaches when evaluating ESG related performance. This included practices ranging from simply having company management fill out questionnaires, to more complex fundamental research techniques to assess the degree of a company’s adoption of ESG objectives into corporate strategy.

With a plethora of data providers entering the ESG space, the evolution of more sophisticated and comprehensive data sets are now available to investors, but usage is still hindered by a lack of standardization and a framework to aid in interpreting the data. The result is that many investors still lack an easy way to digest this vast amount of information to make actionable decisions. This is particularly true with managers that are more accustomed to fundamental investment approaches, where quantitative techniques are unfamiliar and hard to reconcile with their existing ways of thinking.

We will show below that quantitative techniques have a number of advantages, and demonstrate that there is an easier way to visualize and interpret information on large (and small) portfolios of individual equity and/or bond positions, as well as groupings of investment managers where the underlying investment positions are known.


This week, we will take a “real-life case” to demonstrate how an Asset Owner would utilize Omega Point’s platform to evaluate portfolio holdings through an ESG performance metric lens.

We have made the subject of our study anonymous, hereafter referred to as Asset Owner “X”, but we can say that it is a well-known Public Employee Retirement System of one of the largest cities in the United States. Recently, this entity has publicly voiced a commitment to integrate ESG factors in order to have a positive world impact, and that ESG is considered fundamental in supporting their broader mission. As part of their “Total Fund View”, ESG is considered In assessing both risk as well as potential opportunities, across all of their investment portfolios.

To evaluate how well Asset Owner X is achieving this goal in their single US stock positions, we will analyze this subset of their holdings using a list of equities the pension fund regularly publishes. As in our previous Factor Spotlights, we use ESG data from one of our specialist data provider partners, OWL Analytics (http://owlanalytics.net/), to evaluate Asset Owner “X”s portfolio in terms of ESG KPI (key performance indicators) performance.

Screen Shot 2019-09-07 at 6.38.26 PM

One of the most common approaches to building an ESG portfolio is to eliminate those companies which breach a certain threshold of acceptability in terms of alignment to a defined set of values, otherwise known as “negative screening”.

The chart above shows the Portfolio’s overall active ESG exposures versus the Russell 1000 benchmark over a one-year look back period. As we can see, the portfolio experienced some good performance as measured by the list of ESG metrics presented on the right, although generally there is slight downtrend trend in KPI performance over the course of the year. One key KPI stands out by sitting alone from the pack at the bottom of the chart presenting a big red-flag. This is the beige colored line: Management Ethics, a metric that has consistently underperformed over time period sampled. When we look through this particular KPI to the companies that are contributing to this extremely poor score (right table expanded into security-specific KPI attribution), we see that there is one blatant culprit in the portfolio, which may or may not be surprising to our readers — Berkshire Hathaway (NYSE: BRK.B).

Screen Shot 2019-09-07 at 7.16.08 PM

Berkshire Hathaway’s ESG scores are generally poor, but Management Ethics has been a strong negative contributor to its score, pushing the company into the bottom quartile of its peer group. Granted, BRK owns many companies, making its ESG calculation a challenging task, but that does not give it dispensation. The metrics below shine a light on the degree that the company is doing little to improve its dismal ESG scores. In fact, all nine of the individual KPI’s are very negative, and several are getting worse, with the exception of one, Charity and Community, indicated by the blue line with the overall ESG score at -1.42 (still very poor). Perhaps, we shouldn’t be too surprised about BRK’s ESG scores given Warren Buffett’s opinion that scoring well on ESG metrics “adds to costs” and his equal disdain about the time wasted in having to fill out numerous questionnaires.

Allocator “X” has a relatively large position in their portfolio, with 3% of total equity invested in this stock. Although Buffett can show contempt for the importance of ESG, allocators such as Asset Owner “X” may increasingly drive him to abandon his stubborn stance and capitulate to the growing importance of ESG that his shareholders are bound to impose.

Next week, we will continue our evaluation of Allocator “X” and look at another sleeve of their overall investment program, the allocations in active investment managers, including those firms which are PRI signatories and those that are not.

This Week's Market and Factor Update:

US Market (8/23/19 - 9/5/19)

Sep-06-2019 23-22-51
US Stock Market Cumulative Return: 8/23/2019 - 9/5/2019
  • Following a dismal first few weeks in August, all the major US indices have rebounded to 4-5% gains since our last update.
  • Stocks finished higher for the second consecutive week, with the S&P 500 within 1.5% of reaching a record high it set on July 26.
  • While recent US economic data has been mixed, news that the U.S. and China agreed to hold trade talks along with easing tensions in Hong Kong have been driving a broader global stock market rally.
  • Trading volumes picked up as many investors returned from summer vacations, and the VIX fell back to its lowest level since late July this past week.
  • Sentiment also got a boost after New York Federal Reserve President John Williams said that the central bank will act as appropriate to sustain the current economic expansion.
  • Across the pond, European markets experienced one of the best weeks since June as the prospects of the disorderly Brexit receded.
  • Bank stocks got a boost as the U.S. yield curve uninverted, with the 10-year rate trading above its 2-year counterpart.

US Model

Screenshot 2019-09-07 12.49.17
Methodology for normalized factor returns
  • Growth extends its steady march over the past several weeks into positive normalized return territory, and finished atop the leaderboard across both absolute levels and 2-week delta.
  • Momentum continues to shake off its Oversold designation after hitting a trough in early August, and ended on a par with Growth as the period's biggest positive mover.
  • Market Sensitivity and Volatility continued to sell off.
  • Size maintains its weakness, but now appears to be clawing back from the Extremely Oversold precipice (-2 SD below the mean) where it appeared previously.
  • Earnings Yield not only exited positive territory for the first time since early July, but also ended this period with the ignomious label of biggest 2-week slide.
  • US Total Risk (using the Russell 3000 as proxy) jumped over 1%, hitting levels not seen since mid-April.

Worldwide Model

Screenshot 2019-09-07 22.16.29
Methodology for normalized factor returns
  • Worldwide Growth is showing strength also being seen in the U.S. models, and finishes the 2-week period with the largest positive normalized change.
  • Momentum finally crossed into positive normalized territory for the first time since early July.
  • There is little end in sight to the free fall in Value and Earnings Yield, with both now sitting deep in Oversold territory.
  • Size may have finally found some positive support after plummeting over the past several weeks.
  • Market Sensitivity continues to slide deeper into oversold territory.
  • Profitability whipsawed into the oversold realm, taking the biggest hit by far of the period.
  • Moving lockstep with its US counterpart, Global Total Risk (using the ACWI as proxy) rose close to 1%, also coinciding with levels not seen since mid-April.

The Omega Point Team

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