Avoid ESG tail risks to help generate alpha, new research shows



New research by Allianz Global Investors, one of the world’s leading active investment managers has found that avoiding environmental, social and governance (ESG) tail risks is a more effective strategy to help generate alpha over a full market cycle, than tilting a portfolio towards top ESG ratings.

Key takeaways

  • New AllianzGI study shows that avoiding ESG tail risks is more important than the average ESG quality for the risk/return profile of a portfolio
  • Actively managed integrated ESG investment strategies appear well-positioned to unleash long-term compound alpha opportunities

The research, undertaken in-house, looked at three different areas related to ESG risk factors including their effect on risk and reward; type of ESG risk; and value-add of active investing and stewardship through corporate engagement and proxy voting.  

The research found yielded three clear results:

1. ESG factors matter for downside risks
The findings confirm academic research on ESG  that simply skewing portfolios to better ESG risk scoring holdings does not generate higher returns. AllianzGI’s research shows   that portfolios skewed to a worse ESG risk profile can show significantly more financial portfolio tail-risk vs. the benchmark.

2. Manage the low ESG-rated holdings
The research also found that investments with a higher ESG risk scoring delivered a very similar risk profile when compared to the benchmark. But this is not the case when it comes to low ESG risk-rated portfolios, with a significant difference in the lower tranche, indicating the need to address ESG as a source of tail risk through fundamental research and active management. Managing low ESG-rated holdings is more relevant for compound returns than tilting towards high ESG-rated companies in portfolios.

3. Active management is key 
The research provided further evidence that investors should not solely rely on investing in companies with high ESG ratings or avoiding high ESG risk holdings. It demonstratesthat a simple passive or tilted ESG strategy would actually overpay by concentrating assets without an additional return. To fully address ESG risks, there are a host of ESG factors that investors must pay attention to in the future, including constantly changing macro and regulatory dynamics, as well as corporate fundamentals, market and political events. 

Passive rules-based ESG index strategies can be challenged  as the performance of ESG investment indices is often driven by unintended factor changes. Although the performance impact of active stewardship through corporate engagement and proxy voting is hard to measure in the short term, there is good evidence that it adds value in the mid-term.

Steffen Hörter, Global Head of ESG at Allianz Global Investors and co-author of the study, comments:

“Even though our findings indicate that ESG risk can signal material financial downside, overall avoidance of ESG risk per se is not the answer either.  While accounting for ES&G factors in your investment portfolio may not boost its upward performance, it could  be an effective source to generate alpha by helping to manage downside risks.  Avoiding large portfolio draw-downs by ESG risk management can help contribute to better risk-adjusted returns. 

It is important that ESG risk is not about average portfolio risk, but about extreme events that are financially material and stem from an ESG-related source. We are convinced that active managers who make a judgemental risk/reward trade-off on ESG risks will prove their worth  to investors, in comparison to the simple ESG portfolio tilts we have seen in the passive investment industry.”

To understand how ESG factors may affect portfolio risk and return, the historic investment performance of European and global equity portfolios between 2008 and 2018 was analysed. The study looked at three different areas related to ESG risk factors: their effect on risk and reward, type of ESG risk, and value-add of active investing and stewardship through corporate engagement and proxy voting. The study is available for download at AllianzGI.com/ESGTailRisks


For further information please contact:
Alastair Fairbrother, Tel. 44 020 3246 7432
Sarah Einig, Tel. 44 020 3246 7846
Vivi McDuell, Tel. 44 020 3246 7251
Email: ukmedia@allianzgi.com

About Allianz Global Investors
Allianz Global Investors is a leading active asset manager with over 770 investment professionals in 25 offices worldwide and managing more than EUR 535 billion in assets for individuals, families and institutions*.

Active is the most important word in our vocabulary. Active is how we create and share value with clients. We believe in solving, not selling, and in adding value beyond pure economic gain. We invest for the long term, employing our innovative investment expertise and global resources. Our goal is to ensure a superior experience for our clients, wherever they are based and whatever their investment needs.

Active is: Allianz Global Investors  

*Assets under management data as at 31 March 2019, all other data as at 31 December 2018.

Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks.


IndInfravit Trust and Sadbhav Infrastructure Project Limited (SIPL) enter into definitive agreements for the acquisition of the entire equity holding of SIPL in nine of its operational road projects¹ by IndInfravit.



IndInfravit Trust (“IndInfravit”) and Sadbhav Infrastructure Project Limited (“SIPL”) today executed definitive agreements whereby IndInfravit has agreed to purchase the entire equity shareholding of SIPL in nine of SIPL’s operational road projects¹ (“Roads Portfolio”) from SIPL.

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