April 20, 2011
The rapid asset rebalancing by institutional investors into emerging markets investments and corporate bonds could drive up long-term investment risk for those that don’t integrate environmental, social and governance (ESG) factors into their portfolio construction, according to an adjusted study by quant researchers at risklab, part of Allianz Global Investors, the €1.5 trillion asset manager.
The latest Risklab study, titled: Responsible Investing Reloaded, shows that that the tail risk of an ESG risk adjusted emerging market equity strategy can be almost halved, dropping to -38.8% per annum compared with -64.5% per annum for an ESG neutral portfolio defined by the MSCI Emerging Markets Index.
The firm chose carbon emission rights price changes and sector specific carbon footprint data for its E (environmental) data inputs, social performance risk data from GES Investment Services for its ‘S’ inputs, and governance ratings from RiskMetrics (now MSCI) for the ‘G’ risks in order to ‘operationalise’ ESG risks and run stochastic models with 10,000 different capital markets scenarios.
By Hugh Wheelan