Savita Subramanian (BofAML, Quant team) finds further evidence that investors need to pay attention to ESG. In her 5th note on ESG, she finds ESG is largely uncorrelated with other fundamental factors.

She argues "(see top chart)

2) The proof is in the performance. Adding ESG to a…

·         Value strategy (Low forward PE) would have increased returns by 200bps per year (pretty remarkable in a year where Value funds are struggling to maintain a 70bp lead vs. the benchmark).

·         Dividend Yield strategy would have added an extra 300bps per year.

·         Growth strategy (Earnings Estimate Revision) strategy would have improved returns by 150bps or more per annum."

She further suggests  adding ESG to traditional factors would have lowered investors probability of losing money almost across the board (see chart above)

She notes in one of her recent surveys that only a minority of quant funds are using ESG as a signal, even though they are using around 20 signals on average.

This gives me some comfort as a bottom-up fundamental active manager. However, the data is looking increasingly powerful on the quant side as well. There have been positive findings across other ESG data sets (with Sustainalytics and MSCI being the two other most used data sets; this one is the Thomson Reuters data set), although the correlation between these data sets remains relatively poor at between 0.3 to 0.5 in the studies and work I have seen.

The other factor this work and similar raises is the power of passively managed funds. They now make up over 40% of US-dom equity funds up from 20% in 2009, and I do not see this trend changing any time soon. In fact various forces may if anything accelerate this trend.

Vanguard now owns more than 5% of over 494/500 S&P 500 companies. Vanguard is now the steward of many people's capital.  That man in the street through Vanguard now owns 1/20th of the largest companies in the US.  It will be interesting to see how stewardship evolves in this situation.

More thoughts:    My Financial Times opinion article on the importance of long-term questions to management teams and Environment, Social and Governance capital.

 One of the best Munger speeches on how to think about a mental model of inversion can be found here.

March 2018 thoughts on greed, fear and risk.