Candriam Captures the Long and the Short of Sustainable Investing
New fund integrates ESG and financial analysis to separate leaders from laggards in pursuit of decorrelated returns.
It’s far from a straightforward task to combine sustainability objectives with investors’ traditional priorities of diversified and non-correlated returns, but global multi-specialist asset manager Candriam believes it has squared this particular circle.
Launched at the end of August, the Candriam Equities L ESG Market Neutral Fund invests long in companies the manager regards as sustainability leaders, while shorting stocks identified as less sustainable.
By targeting both leaders and laggards, the overall intention is to generate stable and positive – but “decorrelated” – returns from an investment universe focused on liquid stocks across global developed markets. To deliver both returns and sustainability performance, the actively managed strategy combines financial and ESG analysis within a systematic market neutral framework that limits volatility to around 5%.
“This strategy is well-suited for investors seeking a diversified absolute return, medium volatility approach with a focus on sustainability, without taking significant exposure to market direction,” said Bart Goosens, Candriam’s Global Head of Quantitative Equity and Deputy Global Head of Alternative Investments, who manages the fund alongside Dave Benichou, Deputy Head of Quantitative Equity.
The fund is categorised as Article 8 under the EU’s Sustainable Finance Disclosure Regulation.
Candriam, owned by New York Life Investments, has approximately €145 billion (US$159.79 billion) in assets under management.
Integrated approach
According to Candriam, the fund’s investment philosophy is underpinned by a belief that long-term value lies in financially sound companies adhering to robust ESG standards, while firms exhibiting weak financial fundamentals which also neglect ESG performance and principles are unlikely to prosper.
“Our ESG analysis integrates a broad range of ESG criteria, such as how a company engages with its key stakeholders, like employees and customers, how it manages major challenges such as climate change, and whether it is involved in any controversies,” said Goosen.
“For example, some companies have a poor reputation for managing the interests of their employees and other stakeholders. Others are lagging from a climate point of view, which can expose them to a transition risk.”
Transition risk is a particular concern, with institutional investors scrutinising the plans of portfolio firms for credible efforts to align with the Paris Agreement. Food producers and oil and gas companies are currently among the least aligned, according to a recent report from the Transition Pathway Initiative Centre, part of the Grantham Research Institute on Climate Change and the Environment, based at the London School of Economics and Political Science.
When seeking out long and short investment opportunities, Candriam considers financial and ESG criteria simultaneously in the construction of a diversified market neutral portfolio that also takes account of risk and ESG objectives.
Starting from its broad and liquid investment universe, Candriam’s ESG team applies a proprietary ESG model to evaluate each company’s sustainability credentials, before its Quantitative Equity Team assesses and scores its financial strength, evaluating value, quality, growth, market sentiment and volatility.
“We select the most attractive companies for purchase, based on a quantitative financial analysis, from among those that are highest-rated according to our ESG criteria, and selecting the least financially attractive companies for short selling from among those that are lowest-rated according to our ESG research,” explained Goosen.
Stable return profile
The strategy’s use of proprietary analysis – from both a sustainability and fundamentals perspective – means performance depends on alpha generation rather than beta, thus also ensuring decorrelated returns, according to Goosen.
“The strategy’s equity market neutrality ensures that returns are primarily driven by the selection of individual stocks rather than broad market movements. This approach is designed to minimise the impact of overall market volatility and provide a more stable return profile,” he said.
“By investing both long and short in liquid global equities with a limited overall net market exposure, the beta of portfolio relative to a global market equity index such as the MSCI World index is expected to be small.”
Candriam’s Quantitative Equity and ESG teams have been collaborating for over a decade, until now managing a range of long-only ESG strategies. According to Goosen, the new fund represents a continuation rather than a new direction.
“The ESG team provides ESG scores and other relevant information to the investment team who incorporates this data into the investment process, alongside financial and risk metrics, during the monthly portfolio rebalancing,” he said.
The strategy is part of Candriam’s newly-integrated Alternative Investment platform, which provides clients with diversification via the provision of a wide range of strategies with various risk profiles and investment goals, ensuring that our clients have access to the tools they need to build resilient and diversified portfolios.
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