Nordea has concluded that investing in companies with improving ESG performance, or positive selection strategies, could result in higher returns compared to a pure divestment or best-in-class approach.
Positive selection differs with a best-in-class approach as it does not necessarily focus on the best ESG rated companies but all companies whose ESG performance are on a positive trend, with room for further improvement.
In a new report which analysed existing research on the topic, the Nordic financial giant found that divesting worst performing companies or only investing in ESG leaders could put pressure on returns due to a loss of diversification.
The report said while exclusions could boost returns, historical data showed that “short-term excess returns ... are more about coincidences when an excluded sector underperforms”.
It concluded: “Positive selection strategies could be a ‘sweet spot’ because they take advantage of ESG factors, …