ESG aka Quality

Recent joint research by Scientific Beta and Edhec Research Institute concludes that the ESG outperformance does not differ from what would be achieved by investing in ‘quality’ stocks, a well-established strategy of proponents of factor investing. 

This dovetails with AlphaValue’s constant observations after 10 years of criss-crossing its proprietary data base on all matters ESG with its proprietary financial data: sticking to quality will do the ESG job. Our observations fall well short of any scientific work but are well intended as AlphaValue does not trade but gets paid for clean ideas.

ESG is here to stay in Europe and most likely in the US and now China. The EU political choices since 2015 have been to drive its economies in a more environmentally friendly way by pushing here and pulling there in a formidable set of directives and laws whereby markets are instrumental in driving money in the right place, from a society/political standpoint. Not necessarily from a financial standpoint.

Pricing that move is risky as all investible businesses are bound to take that ESG route anyway and as fast money has been quick to capitalise on fund flows animated by retail ESG sentiment, tweaking prices much more quickly than any fundamental forecasting would warrant. ESG becoming real is about a fundamental change in business models which will take years.

ESG timetables are not suited for any investor. Positive ESG-driven intents will evaporate as soon as markets wobble. This is why chasing quality as an ESG proxy makes sense. Quality means a big firm already endowed with a business model rich enough to fund needed adjustments and an enlightened board able to see beyond shareholders’ immediate cash returns.

The quality cat can be skinned in thousands of ways. It remains easier than trying to make sense of unstable and absurd volumes of data flowing on ESG metrics, with no easy bridge on valuation impacts.

Here is a list of top-notch stocks from the point of view of their business model (Fundamental Strength), of their balance sheet (AlphaValue’s credit risk) and their Sustainability (AlphaValue’s metrics, highly geared to independent governance).

Some top ‘quality’ stocks

Companies Sustainability score Credit Risk Fundamental Strength
ABB6.77A8
ADIDAS6.30A7
ADYEN5.60A10
AIR LIQUIDE6.29A7
ASML6.82AA10
ASTRAZENECA6.54A7
ATLAS COPCO5.77A10
BHP GROUP7.23A9
DEUTSCHE TELEKOM5.57BBB8
DIAGEO6.22A9
GLAXOSMITHKLINE5.90A8
LINDE PLC6.27A7
L’OREAL6.05AA7
NESTLE7.05A8
NOVARTIS5.87A7
NOVO NORDISK6.15AA9
RIO TINTO6.12A7
ROCHE HOLDING6.64AA8
UNILEVER7.66AA8
ZURICH INSURANCE GROUP6.707

Alternatively, AlphaValue’s clients may have a look at the Buy & Hold list of 25 names that has done consistently well over the last seven years and boasts a sustainability score of 5.8/10. 

Posted in ESG