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Can quant strategies improve ESG performance?



ImpactAlpha, June 9 – When environmental, social and governance funds outperformed the broader market during the COVID downturn, you could almost hear the collective sigh of relief. It was the first real test for ESG funds in a major market slump.

The fact is, these responsible investment funds still suffered massive losses alongside the broader market – just slightly less massive. From 2010 to 2019, ESG equity funds have slightly underperformed the market.

“Our view is that ESG can and should do better,” says Basil Williams, CEO of alternative investment manager Welton Investment Partners.

Focus on workers, customers and governance drive ESG outperformance amid COVID uncertainty

While ESG can help avoid company-specific “idiosyncratic” risk, he says, most ESG funds are long-only and therefore subject to broader market trends. The firm’s new ESG Advantage, launching this week, combines quantitative models with ESG screens to protect responsible investors from market upheavals.

“The COVID crisis,” Williams told ImpactAlpha, “has refocused people on the fact that there is investment risk, and it’s often highly unpredictable.”

Market signals

Welton’s algorithms track macro indicators including interest rates, commodity prices, global currencies and P/E ratios that can flag turbulence.

In January, its models detected falling interest rates, then sinking prices for crude oil flashed risk, leading the firm to take short positions starting in February. Welton’s flagship systematic macro program gained 12.5% in the first quarter, according to eVestment, while the S&P 500 plummeted nearly 20%.

The Knights of Columbus, a faith-based investor, is the seed investor in ESG Advantage.

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