A sustainable approach to factor investing
Northern Trust Asset Management manages US$168 billion in ESG assets globally and is a top ten player in the factor investing space. The firm has been recognised in Asia Asset Management’s (AAM) Best of the Best 2022 Awards, as co-winner of Best ESG Manager in Asia, Best Application of ESG and Best Factor Investing Manager.
According to John McCareins, head of asset management, Asia Pacific, through its integrated ESG and factor investing approach, the firm has seen exceptional growth in APAC over the two years of the pandemic. From 2020 through to early 2022, new clients have come on board from South Korea, Hong Kong, Singapore, Malaysia, Australia and New Zealand to embrace the firm’s integrated solution. ESG client growth in APAC was also close to 75% over that time period, with ESG AUM growth up by 40%.
On the ESG side, the firm launched around $6 billion in ESG mandates and various pooled fund strategies throughout APAC. It was a similar story for factor investing across the region too, with around 150% growth in clients over the pandemic period, and around 142% increase in AUM.
“We find that our investment philosophy is resonating with clients, and is consistent with our view that investors should be compensated for the risk they take in any market environment,” Scott Bennett, head of quantitative solutions, Asia Pacific, tells AAM.
“The additional insight that comes from our risk assessment and, specifically, our incorporation of ESG within portfolios helps ensure that we’re not just delivering on profitable outcomes, but sustainable outcomes as well,” he adds.
Over the last couple of years the firm has also been developing its ESG framework through its proprietary Northern Trust ESG Vector ScoreTM – a measurement that assesses publicly traded companies in the context of financially relevant environmental, social and governance (ESG) related criteria that could impact their operating performance. The firm uses best in class ESG data providers to identify those ESG characteristics that are relevant for a particular industry.
“We systematically identify the issues that are material for each company and utilise several best in class data vendors to inform our score,” he explains. He also notes the inclusion of forward-looking estimates that not only provide an historical view but also a trajectory as to how those characteristics might perform in the future.
For Bennett, it’s a process that helps to inform not only how a portfolio is positioned, but also how engagements with companies are structured.
ESG trends
Climate change, net zero and decarbonisation are key ESG trends, but sustainability is key.
“We’re looking at sustainability of the planet we live on, sustainability of the communities we live in and sustainability of the businesses we invest in,” says Bennett.
“We believe material environmental, social and governance factors are pre-financial indicators that can affect a company’s future financial viability and clients’ long-term risk-adjusted investment returns. When managed well, they can position a company for success and when mismanaged, they can result in significant risks,” he adds.
When it comes to portfolio design and application, McCareins observes investors being split across a number of different objectives.
“For some, the goal is not necessarily outperformance, but rather managing to a specific thematic goal, such as lower exposure to carbon. Other investors want to take a more conventional approach: they want to see excess returns whilst also achieving decarbonisation, so depending on the investors’ philosophy or preference it might be a combination of both. We’re also seeing clients interested in global equity mandates with ESG integration, or narrowing to Australian equities specifically or pivoting to fixed income strategies all seeking to mitigate climate change related risk or incorporate sustainable investing considerations,” he explains.
For Bennett, sustainability and factor investing, both globally and specifically within the APAC region, lie on the same spectrum.
“When we consider ESG factors we’re really uncovering what other factors are associated with that ESG profile and how we can best leverage our knowledge of factors to enhance our ESG results. We are also looking at how we can use our knowledge of ESG to enhance our factor results,” he explains.
And the numbers quoted by McCareins bear themselves out: 60% of NTAM’s Asia-based AUM today incorporates specific ESG metrics, goals and targets, a figure that extends to 90% for Australia.
Mitigating risk
As well as demonstrating its commitment to sustainability and factor investing, Northern Trust Asset Management is confident of how its factor investing approach has resonated with investors across the region. Bennett notes there has been increasing acknowledgment that factors and material return drivers across investment markets have key influences on portfolios and returns.
“We’re seeing a more sophisticated investor base, where investors are much more aware of the risks that are present in their portfolio and are looking for asset managers who can help manage or mitigate uncompensated or unintended risks,” he says.
“Investors are embracing the systematic nature of factor investing and appreciate the consistency it offers. Transparency and risk management are key drivers to investors taking on board the benefits of factor investing.”