Environmental Performance Decomposition
Last week, we looked at general performance in each of the Environmental, Social, & Governance portfolios that we constructed using KPIs from OWL Analytics.
- Take OWL Analytics’ 12 main KPIs (hierarchy below) and create equal weighted portfolios that are long the top 200 and short the bottom 200 companies in the Russell 1000, ranked by their exposure to those KPIs.
- Bucket and aggregate each of these 12 portfolios into one of the three higher level portfolios that they belong to.
- Create a sector neutral version of each of those portfolios to remove sector bias, then measure performance from 2014-2019.
As we’d established earlier, we’re measuring performance in a sector neutral fashion. Here’s a table with the broader results:
Now we’ll break out the performance of the Environmental bucket by each of the three individual components:
Environmental Transparency (Sector Neutral): 2014-2019
Pollution Prevention (Sector Neutral): 2014 - 2019
Resource Efficiency (Sector Neutral): 2014-2019
Due to positive performance and high return from alpha, it looks like Pollution Prevention is the KPI that investors might want to target the most under the Environmental umbrella. What we find notable is that all three legs of the Environmental portion of ESG have seen very positive movement since mid-2018.
This week's market and factor update:
US Market (7/12/19 - 7/18/19)
- The S&P 500 and NASDAQ closed at new highs on Friday (not captured in above graphic). The S&P 500 is now up 20.7% YTD.
- Investors were encouraged by solid corporate earnings, government approval of the T-Mobile and Sprint merger, and better than expected economic growth as 2Q GDP grew at a 2.1% pace vs. 1.9% consensus.
- Looking beyond the headline number, consumer spending showed +4.3% growth vs. +1.1% in 1Q. Business investment, however, fell by 0.8% which was the biggest drop in 3.5 years.
- The House passed a two-year spending agreement to lift the debt ceiling, boosting spending by $320B over the limit set in 2011 and suspending the debt ceiling until the end of July 2021.
- All eyes are on the Fed next week, with the market decisively baking in a 25bps rate cut in spite of the better-than-expected economic data.
- Earnings Yield had the biggest increase, surging +0.61 standard deviations in the past week and nearing the cusp of an Overbought designation.
- Value reverted to the mean and continued marching upwards on a normalized basis, bouncing back from a recent trough of -1.39 SD below the mean on 6/24.
- Volatility, Market Sensitivity, and Profitability slowly drifted higher into Overbought territory.
- Momentum continued to fall beyond the mean after reverting from its recent peak of +2.79 SD above the mean on June 10th.
- Worldwide Profitability saw a big jump in normalized returns, +0.55 standard deviations over the past week.
- Just like in the US, the risk-on factors of Market Sensitivity and Volatility have been bid up into Overbought territory.
- Momentum continued to fall globally, and is on pace to enter Oversold space in the near term.