This week, we would like to highlight a recently published paper sponsored by Mexico’s CFA Society titled Diversifying Risk and Beating the Market through ESG – Evidence from Latin America. It evaluates the historic performance of traditional benchmarks compared with select ESG indices across the United States and some Latin American equity markets. It also provides valuable insights on the potential benefits and risks associated with ESG investing in these regions. Its findings and methodology are quite interesting, so we would suggest a full read. In the meantime, here are some of the paper’s most relevant conclusions:
- Mixed evidence: The American, Colombian, and Mexican ESG indices generally outperformed their benchmarks in terms of risk-adjusted returns, while the Peruvian, Brazilian, and Chilean ESG indexes lagged.
- Comparable volatility: Half of the time, ESG indices’ volatility was comparable to that of their respective benchmarks. However, when analyzing efficiency ratios (Sharpe, Sortino, and Omega) for the American, Colombian, and Mexican cases, evidence showed better excess returns per unit of volatility and downside volatility.
- Diversification impact: There was no hard evidence proving ESG indices to be less diversified than any other indices.
- Macro influence: Macroeconomic variables have limited explanatory power for variations observed in ESG indices’ performance compared to their benchmarks. Further research is needed to clarify the influences of constituents and market cycles on ESG performance.
While this paper’s findings can’t quite prove whether sustainable investments are a better bet than other market benchmarks in terms of risk-reward, it is now evident that markets assign greater value to compliance with ESG guidelines than they did before. The relevance of non-financial factors in investors’ decision-making processes will most likely continue to grow.
Investors and companies alike can leverage these insights to make informed decisions and develop strategies that align with both their regular corporate and ESG objectives. At Miranda ESG we would be happy to help you and your company to devise a comprehensive ESG strategy that fits your needs.
I hope you found this interesting. As usual, if there is anything we can help you with, or if there is an ESG topic you would like to know more about, please let us know.
CEO, Miranda ESG
Contacts at Miranda Partners