Executive Summary
- The multi-factor ESG model slipped somewhat in its consistency in the past few months. The Top18 (T18) equally weighted QESG shares vs the Bottom18 (B18) tested positive in 11 of the past 20 months or 55% of the time.
- The T18 of the QESG model has gained 22.4% since inception in November 2021, and is up 3.6% YTD. This compares favourably with the Top 40 Equally Weighted Index which has returned 18.2% since inception and 3.5% YTD. Over these time horizons, the JSE AllShare Index is up 20.6% and 5.9% YTD.
- The primary factor, greenhouse gas emissions to turnover (GHG/TO) continues to outperform, having tested positive in 60% of the months since inception with a margin of 28.5% if the T18 is compared vs. the B18. The T18 of the model has gained 24% independently.
- From a long-only perspective, the 3rd party scores of Sustainalytics and Robeco outperformed the QESG ranking with returns of 34.6% and 34.3%, respectively.
- The 3rd party scores of MSCI ESG have also been testing positive with a still respectable outperformance margin of 23.7% if the T18 is compared to the B18. The T18 (long only) has gained 25.6%.
- Large cap industrial rand hedges, financials, and retailers currently rank high on the QESG scores. There are no resource-related counters in the T18.
- NEPI Rockcastle N.V. gained in the ranking after its scores from MSCI ESG and Sustainalytics improved, while Sanlam and Absa both fell due to their CDP (climate disclosure performance) and ISS scores declining.
The Multi-Factor ESG model backtest results to 30 June 2023
The T18 of the QESG ranking table has gained 22.4%, while the outperformance margin between the T18 vs. B18 equally weighted companies was 20.4%, giving back some of the gains from earlier in the year.
The 3rd party scores still dominate our model, but combined with the primary data of greenhouse gas emissions to turnover, the performance of the overall multi-factor model is enhanced.
The graph below depicts the performance of the Quantitative ESG multi-factor model Top18 vs. Bottom18 shares equally weighted, month on month (blue & red) and cumulative performance of the T18 (green).
(Source: Sinayo Securities)
The graph below shows the monthly performances of the T18 ranked ESG companies equally weighted and the most comparable general index, the Top40 Equally Weighted Index (T40 EW Index). After opening a substantial gap to the T40 EW Index, the gap was closed in the past few months. June saw the QESG T18 just edging ahead of the T40 EW Index once again. Selective resource counters at the top of the ranking put in dismal performances over the YTD period and their performances were partly responsible for the above outcome. Resources companies are the companies that have spent and done the most to improve their compliance regarding ESG matters. Amplats and Anglo American are the only resource shares still left in the T18. Deteriorating commodity prices that directly impact their turnover are affecting their GHG/TO ranking. Interestingly though, both Amplats and Anglo American still rank high on the 3rd party scores of Sustainalytics and Robeco.
The graph below depicts the performance of the T18 of the QESG ranking monthly (green) & Top40 EW Index (blue).
(Source: Sinayo Securities)
Factor backtest results to 30 June 2023
We consider backtesting results from two perspectives: the relative returns comparing the T18 to the B18 of each factor as well as how the T18 baskets performed independently. After running the model for 20 months now, we review the results below.
The 3rd party scores of Sustainalytics and Robeco continue to have the highest outperformance margin and best-performing scores from a long-only perspective. Greenhouse gas emissions to turnover (GHG/TO) is the 3rd best performing factor if one considers the relative performance between the T18 and B18. It is just narrowly underperforming the MSCI ESG scores from a long-only perspective. Our research shows that the 3rd party scores, which tend to be broader based, including the E, S and G factors tend to outperform the factors that are more focused on a specific category such as governance issues in the case of the ISS scores.
During the past 20 months the traditional quality factors that we view as a way of quantifying the performance of management and governance, performed poorly especially when the T18 is compared to the B18. Both ROIC and FCF/Yld tested negative by a large margin.
The graph below depicts the performance of the individual ESG scores, T18 vs. B18 ranked, equally weighted, m-o-m.
(Source: Sinayo Securities)
The graph below depicts the performance of the individual ESG data sets, Top18 ranked, equally weighted, m-o-m.
(Source: Sinayo Securities)
Quantitative ESG (QESG) Ranking table
The quantitative ESG multi-factor model reduced the weightings of both the ISS and CDP scores for this ranking due to weaker testing results of the past six months. Mediclinic International delisted from the JSE with restructuring taking place within Remgro. Remgro replaces Mediclinic International in the ranking table. This has caused some movement in the ranking order, especially in the middle of the ranking table. Sustainalytics, Robeco, and GHG/TO attract the highest weightings in the model given their relative outperformance over time.
NEPI Rockcastle joins the T18 after the ESG scores it received from both MSCI and Sustainalytics improved. NEPI Rockcastle’s share price is moving sideways. We suspect that the price will only improve once the interest rate declining cycle gathers momentum. The MultiChoice Group also joined the T18 moving up by 8 places after seeing small improvements in virtually all its ESG scores.
Sanlam and Absa declined to 20th and 24th place, respectively. They both fell out of the T18 due to declines in their ISS and CDP scores. The share prices of both Sanlam and Absa seem to be improving for now; we will hold onto these counters.
Quantitative ESG (QESG) Ranking table
Change to ESG scores and ranks since the previous review
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