Client Case Study
Integration of material ESG issues in quant investment models for Aviva Investors
Aviva Investors is an asset management company and is part of the Aviva Group with over £315 billion in Assets Under Management. Aviva Investors plays a huge role in promoting sustainable business practices across the financial markets. Aviva had a team looking at governance issues since 1990s and in 2014 were one of the first large global fund managers to integrate environmental, social and governance issues into their investment decision-making.
The Aviva Investors equity quant team wanted to better understand if their proprietary quant model can be enhanced through the integration of environmental, social and governance data sourced and/or captured by their global responsible investment team
There is a significant stream of research supporting the hypothesis that firms with better ESG performance have better financial performance in the future. Moreover, there is a series of academic papers that try to identify the mechanisms and the conditions under which better ESG performance leads to better financial performance. At the same time, there is an emerging understanding that materiality of ESG issues varies by industry membership
Our team worked with the Aviva Investors quant team to test the explanatory power of generic ESG factors to financial performance. We develop a framework for an inter-sector integration of ESG issues in firm valuation, identified KPIs and performed the portfolio analysis to test whether an ESG factor exists that improves portfolio performance.
We analyzed non financial information (multiple ESG factors) in the context of the financial information currently used in the quant portfolio. The objective was to:
- Valuate the information provided by different sources (Bloomberg and GMI)
- Answer the question of whether additional and meaningful information is found in the ESG metrics increasing the predictability of the model and
- Identify if the incorporation of this information into the Quant investment process leads to financial significant outperformance