7 June 2018 Equity Quant Changes in ESG ratings have yielded healthy long/short returns Defensive strategies such as high earnings quality and low share price volatility underperformed in tandem with ESG in 2016-17 Operational performance has never been stronger for top ESG companies POSITIVE REL. NEG. ESG RATING CHANGES 135 130 125 120 115 110 105 100 95 2012 2013 2014 2015 2016 2017 2018 Total shareholder return - Long/Short WEAK RETURNS IN DEFENSIVE STRATEGIES 125 120 115 110 105 100 95 90 85 2012 2013 2014 High quality 2015 2016 2017 2018 Low volatility Source: MSCI ESG Research, FactSet and Nordea Source: FactSet and Nordea estimates Top ESG companies have continued to deliver operational performance ESG ratings continue to show a significant link with strong operational performance. Strong ESG companies have on average higher and more stable returns than the market (ROCE and ROE). In fact, the best ESG companies have never reported higher ROCE relative to the market than in 2017. The same applies to share price volatility. The benefits of strong ESG performance is not limited to the level or stability in realised returns – they also hold true for forward-looking stability. In other words, ESG is a good proxy for future stability of returns. Strong operational performance bodes well for the long-term prospects of the ESG investment strategies Stronger-than-average operational performance should in the long run support the share price trend among the companies with superior ESG performance. The forwardlooking aspects of ESG research are often overlooked by the market and are therefore particularly interesting for investors who are in the game for the long run. The better the ESG rating, the lower the share price volatility. .and the better the ESG, rating the higher the returns SHARE PRICE VOLATILITY PER ESG RATING 29% 27% 25% 23% 21% 19% 17% 15% AAA AA A BBB BB Median share price volatility B/CCC Source: MSCI ESG Research, FactSet and Nordea ROCE AND ROE PER ESG RATING 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% AAA AA A BBB BB B/CCC Median reported ROCE 2017 Median fwd ROE Source: MSCI ESG Research, FactSet and Nordea Comparing the best and the worst ESG companies reveals larger differences in volatility and ROCE in 2017 than ever before MEDIAN VOLATILITY RELATIVE TO MARKET 10% 5% 0% -5% -10% -15% -20% -25% MEDIAN ROCE RELATIVE TO MARKET 40% 30% 20% 10% 0% -10% -20% Good ESG performance requires investments. AAA B/CCC Source: MSCI ESG Research, FactSet and Nordea AAA B/CCC Source: MSCI ESG Research, FactSet and Nordea Strong operations are supported by lasting fundamental trends Good ESG practices in a company never or very rarely come for free; they usually require time, effort and significant investments. We argue that the costs and efforts are well compensated, however, by improved sales growth potential, reduced costs and risk mitigation, which have the positive side effect of lowering the cost of capital. .but we argue that companies are well compensated for their investments in ESG There are cases where good ESG performance and business logic are perfectly aligned – energy-saving efforts are good for the environment but also reduce costs etc. Other benefits of investing in ESG come from the fact that companies do not operate in a vacuum but rather in a setting where they are greatly affected by regulations, trends and shifts in consumer behaviour. 3
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