We Don't Need an ESG Alpha Bet

By concentrating on risk management to achieve better risk-adjusted returns, investors are freed of the requirement that alpha exists in ESG investing. This means that we can be ‘good’ without compromising our retirement age.

Returns are hard to predict, but we don’t need to predict returns with greater accuracy to generate better returns from portfolios. We argue that by abandoning return forecasting and focusing instead on risk, we can create a portfolio that has both high risk-adjusted returns and high absolute returns.
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The correlation of equities which are compatible with long-term global warming targets, with world equities is 0.98 over the last decade. Correlation doesn’t tell us about returns, we hear you cry. Well, that’s true, but annual returns of these ‘Paris-aligned’ stocks only lag world stocks by 0.8% per year over the same period, and most of that has emerged since the outbreak of the Russia / Ukraine war (Figure 1).

Figure 1. Comparison of Paris-Aligned Equities and World Equities

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Source: Man Group, Bloomberg; as of 28 February 2023.
Paris-aligned equities represented by MSCI World Climate Paris Aligned Net USD. World Equities represented by MSCI World 100% Hedged to USD NETR USD.

Is there value to be gained in trading ESG-friendly stocks over and above that of some benchmark?

The Hard-Hitting Questions…

It seems fair to question to ask, therefore, whether there is alpha in ESG. In other words, is there value to be gained in trading ESG-friendly stocks over and above that of some benchmark? If there is, our correlation and return observations suggest that considerable management skill is required to find and extract it. Going back to first principles – if anything, running an investment strategy over a subset of a universe (climate-friendly equities, for example) should restrict the opportunity set which should, all things equal, result in lower returns.

There is also the question about whether it’s moral to expect a ESG universe to outperform. Shouldn’t the knowledge that an ESG portfolio is the ‘right’ thing to do be good enough? When we ask this question, often the first answer is “yes”. Followed inevitably, after a brief pause, by “how much might ESG underperform?” When phrased as, “well, you might have to work a couple of years longer before you can retire”, there is often an awkward silence.

…And the Answers

We have asked a lot of questions thus far, so it’s only fair that we propose some answers. We believe it is possible to invest in a portfolio of ESG stocks and generate greater risk-adjusted returns than a portfolio without ESG restrictions. Further, we do not believe that you need to believe in ESG ‘alpha’ to do so. Here’s how.

The thrust of our argument in ‘No More Horses! The Predictability of Returns and Risk’ was that we could extract better risk-adjusted returns from portfolios by concentrating on risk rather than returns. Indeed, the observation that ESG portfolios are so similar to broader portfolios is great news. It implies that the same thought process can be applied. The ‘alpha’ comes from the risk management, not the portfolio selection.

We refer our reader to our ‘We See Risk Where Others May Not’ series (see bibliography at the end) for more detail, but essentially history suggests that there are good times and bad times for taking risks. Broadly, we should take money off the table when: (1) volatility is rising rapidly; (2) when prices fall; and (3) when asset class correlations do things disadvantageously – such as bonds and equities falling in unison, a-la 2022. At other times, however, it pays to be fully invested. Figure 2 illustrates the kind of reactivity that these risk overlays can have on a hypothetical multi-asset portfolio designed to generate around 10% return volatility per annum.

Figure 2. Exposures to Asset Classes for a Hypothetical Portfolio

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Source: Man Group; between 31 December 2014 and 31 December 2022.
The hypothetical portfolio is designed to target 10% return volatility in the long term, but to actively manage risk in ‘bad’ market environments, such as Q1 2018, Q1 2020 (Covid-19) and 2022, highlighted.
Note: The periods selected are exceptional and the results do not reflect typical results. The start and end dates of such events are subjective and different sources may suggest different date ranges, leading to different results figures. Please see the important information linked at the end of this document for additional information on hypothetical results.


We hope this generates a sense of Zen in our reader. It should be cathartic; our investor is freed of the alpha bet in ESG investment. We can be ‘good’ without compromising our retirement age.



Robertson, G. (2021); “No More Horses! The Predictability of Returns and Risk, and Their Use in Asset Management”; https://www.man.com/maninstitute/no-more-horses

Korgaonkar, R. (2019); “We See Risk Where Others May Not: Gearing Up for Uncertainty”; https://www.man.com/maninstitute/gearing-up-for-uncertainty

Korgaonkar, R. and G. Robertson (2021); “We See Risk Where Others May Not: Active Risk Management in Practice”; https://www.man.com/maninstitute/active-riskmanagement-in-practice

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