Study: When an alpha strategy is massively implemented, it becomes a beta strategy

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Between 2010-2013, being a responsible investor would have tended to penalize both active and passive European and North American portfolios. Between 2010-2013 only Environmental-focused passive investors in the Eurozone would have enjoyed outperformance, while effects of Governance-focused and Social-focused portfolios on performance were neutral or negative.

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Our study identifies several performance generation mechanisms, demonstrating that stock prices integrate ESG-related information at different levels. These mechanisms are dependent on the geographic region studied, the ESG focus, the ranking (best / worst-ranking or all gradients) and the period studied.

Overall, in North America between 2014-2017

(i) ESG-portfolios’ excess return increased with the ESG score;
(ii) only best-in-class stocks were remunerated for Environmental-focused portfolios, and only since 2016 for Social-focused portfolios;(iii) and only worst-in-class stocks were penalized for Governance-focus portfolios.

Similarly, in the Eurozone between 2014-2017

(i) both best-in-class stocks were remunerated and worst-in-class stocks were penalized for ESG -and Governance- focused portfolios, and only since 2016 for Social-focused portfolios;
(ii) and only best-in-class stocks were remunerated for Environmental-focused portfolios.

Figure 1 – Overview of performance generation mechanisms per region and observation period