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Invesco: Factor Investing Minimizes ESG Losses

The quantitative factor model is highly appreciated by investors. 66% of investors already consider this approach useful for implementing their ESG objectives (in 2018 only 42% thought so). More than half of respondents say they allow them to “identify and control unintended biases” in their sustainable portfolios. What psychological mechanisms control their investment decisions?

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The concept of factor investing is relatively recent. The idea is to achieve returns based on six distinct sources: value, momentum, size, size, volatility, quality, and dividends. “In the same way that one can invest based on certain regions or sectors, managers can also invest in companies that are cheap from a fundamental point of view (value), or in those that show better relative performance in the short term (momentum), those with small capitalization (size), low volatility or high dividend yield,” explained Fernando Luque, senior editor at Morningstar.

According to a survey published by Invesco on Monday, September 26th, investors point to the value and low volatility as the factors that will perform best over the next 12 months. The same survey also crosses the concept of investment by factors with that of sustainability.

At a difficult time for investment based on ESG criteria (environmental, social, and good governance), 72% of those surveyed say that factor investing is helping them to limit falls in their sustainable portfolios. It should not be forgotten that so far in 2022, unlike in previous years, the main ESG stock market indexes are suffering falls greater than those of the traditional selective indexes.

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The European ESG index loses 12 points more than the traditional one

The largest losses are occurring on the Old Continent, where the Europe ESG Leaders has lost 23% since January against the MSCI Europe, which has fallen by nearly 10.4% in the same period. This spread of more than 12 points is the largest so far this year. In his case, the bad behavior of the firms in the retail sector is especially weighing, with Zalando, Hellofresh, Ocado, and Delivery Hero noting annual losses of more than 50%.

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The gap (2 return points) is smaller, between the MSCI World, in which more than 1,500 companies from 23 developed markets are listed, which is down 15.5% in the year compared to the 17% drop in the MSCI World ESG Leaders. This difference is almost negligible in the Spanish market, where the Ibex 35 and the Ibex Ftse 4Good resist equally with falls of 6% in both cases.

The quantitative factor model is highly appreciated by investors

“By using a quantitative factor model, we can control our exposure and make sure we get the same return as an equivalent but non-ESG portfolio,” said a US institutional investor interviewed by Invesco. The fund manager surveyed 151-factor investment professionals, both institutional and retail, who collectively manage assets of more than $25.4 trillion. 24% of Spanish mutual funds already include ESG criteria.

66% of investors already consider this approach useful for implementing their ESG objectives (in 2018 only 42% thought so). More than half of respondents say they allow them to “identify and control unintended biases” in their sustainable portfolios. What psychological mechanisms control their investment decisions?

Invesco also asked them whether they believe that ESG is in fact an investment driver in and of itself. Twenty-six percent of respondents said yes. For 37%, it is “totally independent of investment factors”, and for another 37% it “appears indirectly in factors such as quality.”

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(Featured image by pasja1000 via Pixabay)

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First published in elEconomista.es, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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Helene Lindbergh is a published author with books about entrepreneurship and investing for dummies. An advocate for financial literacy, she is also a sought-after keynote speaker for female empowerment. Her special focus is on small, independent businesses who eventually achieve financial independence. Helene is currently working on two projects—a bio compilation of women braving the world of banking, finance, crypto, tech, and AI, as well as a paper on gendered contributions in the rapidly growing healthcare market, specifically medicinal cannabis.