Views From the Floor - The Increasing Importance of ESG

The Increasing Importance of ESG

We know that ESG matters more and more to investors every year. But just how much does ESG matter to those who manage public companies?

We would argue that it now matters an awful lot more than it did. The prevalence of words such as ESG, climate change, diversity and data privacy in corporate earnings calls has rocketed since 2018 (Figure 1). ESG now accounts for around 6% of words used in those calls. Climate change accounts for between 3-4%, a rapid rise after a decade in which it became somewhat neglected by management teams. Importantly, 2020 saw diversity become firmly entrenched on the corporate agenda as well, going from almost zero mentions to a peak of around 5%, but have since declined.

The steady rise of data privacy is also intriguing. After a spate of hacks and data outages over the last year or so, could ransomware be the next hot topic?

Figure 1. Word Prevalence in Earnings Call Transcripts

Source: Man Numeric; as of 10 June 2021.

The Clean Retreat?

The iShares Clean Energy ETF (‘ICLN’) has been one of the major winners of 2020, rising more than 140% over the course of the year (Figure 2). However, it’s had a tough time of it in 2021, down 21% since the start of January.

Despite the selloff, demand for shares remains strong, with the number of shares outstanding increasing 56% year to date. In our view, this could well be an indication of the sticking power of the current trend for ESG assets. This could also be an instance of colliding trends, as investors decide to buy two of the big themes of 2021 – looking for Value in ESG assets.

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Source: Man Numeric, Bloomberg; as of 8 June 2021.

Keep Calm, Carry’s On!

For the past few years, time-series Carry has largely been dormant as a bond investment strategy. With very low yields, a largely flat yield curve and an absence of roll-down returns, the returns to time-series Carry were almost no existent.

However, one of the additional consequences of the higher inflation is a reversal of the conditions which have caused the suppression of time-series Carry: increased 10-year yields, a steeper yield curve and the return of roll-down.

Investors, keep calm: Carry’s back on.

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Source: Man AHL; as of 14 June 2021.

With contributions from: Robert E. Furdak (CIO of ESG, Man Group), Otto van Hemert (Director of Core Strategies, Man AHL) and Dave Jepson (Co-Portfolio Manager, Man AHL).