Japanese equity quant improves the effectiveness of human capital data – Asemane One – Bloomberg

We believe that the effectiveness of human capital-related data is improving in Japanese stock ESG (Environment, Social, Corporate Governance) investment products based on quantitative analysis. Asset Management One showed this.This product, which has been performing well, shows the contribution of ESG factors in numbers and is gaining global recognition. Amid the trend away from ESG investing, the company is increasing its balance under management.

The company’s “Domestic Stock ESG Low Volatility High Dividend Strategy” has been operating for more than seven years, and the return of the representative fund since its inception has exceeded TOPIX by 4.48% annually. Due to an increase in assets under management, it stopped accepting investment funds from new customers this month.

The subject of quantitative analysis is data from over 1,000 companies over the past 10 years. Verified the effectiveness of more than 1000 ESG data such as “total energy input” and “greenhouse gas emissions” in predicting stock returns. It is said that over the past two or three years, the effectiveness of items related to human resource development, such as training hours and employee career paths, has increased.

Fund manager Sadaharu Kawai points out that companies that emphasize human capital, such as having diverse organizations, are “strong from a fundamental standpoint.”

Human capital is becoming increasingly important in investment decisions as an element included in the “social (S)” component of ESG. In Japan, companies will be required to disclose human capital information in their securities reports from the fiscal year ending March 2023, and companies are also making progress in disclosing information.

After Russia invaded Ukraine, the performance of ESG investing declined due to the rise in non-owned fossil fuel stocks, and the effectiveness of ESG investing has declined. A question arose. According to Mr. Kawai, the ESG effects of the strategy at that time were less effective in relation to the environment (E), but more effective in relation to human capital.

Hiroaki Wakamura of Mizuho Daiichi Financial Technology and Investment Technology Development Department, who developed the strategy’s operating model, says that the effectiveness of “E,” “S,” and “G” will change depending on the market situation. Show your perspective.

However, over the long term, there is not much difference in the benefits. Of the approximately 4.5% annual excess return on TOPIX, 1.5% is due to ESG factors. If we further break it down into “E,” “S,” and “G,” each of the three elements accounts for around 0.5%.

Even in fiscal 2022, when there were headwinds for ESG investing due to the Russia-Ukraine war and other factors, the strategy’s returns exceeded those of TOPIX. Mr. Kawai said, “Because we are not biased towards a particular theme, we have been able to steadily accumulate performance.”

From 70 billion yen to 120 billion yen in the past year

The number of stocks included in the Asemane One strategy is around 30-50. From over 1,000 pieces of ESG data, we narrow down the data to around 200-300 that have a high correlation with returns and calculate the ESG score for each individual stock. Ultimately, the portfolio is constructed by taking into consideration factors other than ESG, such as high dividends.

Over the past year, the company has increased its operating balance from approximately 70 billion yen to approximately 120 billion yen, mainly for pension customers. Of this amount, approximately 30 billion yen will be an increase in market value, and the remaining 20 billion yen will be a net increase in funds. Customers say that the ability to quantitatively demonstrate how much ESG contributes to returns is valued by customers.

Commenting on points to keep in mind regarding quantitative ESG stock strategies in general, Yuichiro Oura, senior consultant at Russell Investments, said that it is “difficult to establish and maintain an advantage to obtain returns” such as the need to build a model based on financially important ESG indicators. He also pointed out that the opportunities for generating returns through engagement (dialogue) with companies are limited.

Related article

To subscribe to[ESG Weekly]please register by clicking the button at the beginning of the relevant article, or click the relevant subscribe button on NSUB ESG JAPAN.

Next week’s “ESG Weekly” and “ESG Summary” will be canceled.