Active is: Managing tail risks

How do ESG factors impact portfolio performance?

How do ESG factors impact portfolio performance?


Our ESG team examines systematic evidence demonstrating that actively managing ESG tail risks may help to deliver sustainable investment performance over a market cycle.

Key takeaways

  • ESG factors materialise mostly on portfolio downside – not upside
  • Avoiding large portfolio drawdowns triggered by ESG risks can help to contribute better risk/adjusted returns over market cycle
  • While focus on ESG tail risks is important, ESG risk avoidance per se is not a promising investment recipe
  • As the performance of ESG investment indices is often driven by unintended factor changes, passive, rules based ESG index strategies can be challenged

ESG and your portfolio: Managing tail risks through active integrated ESG investing

Astute corporations recognise the importance of environmental, social and governance (ESG) factors for future business success. Investors, too, are paying attention to ESG factors. Incorporating them into investment decisions seeks to provide higher risk-adjusted returns over a market cycle. In some places, such as the EU, there is pending legislation that requires that all funds are ESG risk-managed going forward. Investors are still trying to understand how to fully unlock the performance potenial of ESG risk integration into investment portfolios.

A recent AllianzGI study with a focus on ESG tail risks aimed to find out which process of ESG integration looks most promising.

To understand how ESG factors may affect portfolio risk and return, we analysed historic investment performance of European and global equity portfolios between 2008 and 2018. The study looked at three different areas related to ESG risk factors. First, we provided evidence for the materiality of ESG factors from a risk rather than a reward perspective. ESG is priced on the downside rather than the upside. Second, we analysed which lens investors should use to see how ESG portfolio risks affect their investment performance. Third, we examined the value of active investing and stewardship through corporate engagement and proxy voting.

We largely framed ESG risks in the following manner, which helped us to address and examine ESG portfolio risk in-depth.

ESG Risk Macro Sector Portfolio Idiosyncratic
Financial Impact Loss of gross domestic product Sector devaluation Portfolio tail risk EPS revisions credit downgrades
Modelling ESG extended econometric models ESG Integrated assessment models Sector ESG materiality framework (SASB/ proprietary) ESG (tail) risk portfolio modelling ESG extended DCF models
ESG in credit ratings
Real-life examples GDP at risk due to climate change Coal sector devaluing Carbon price stress testing Daily newspaper
Regulatory ESG Risk (i.e., ESG litigation, CO2 tax and trade)
Applies to nearly all asset classes

Our research indicated three clear results.



Active is: Finding new sources of income

Adjusting to a lower-for-longer rate environment

by Franck Dixmier | 01/07/2019
Adjusting to a lower-for-longer rate environment


A low-growth, low-interest rate environment is firmly established globally, and a combination of external forces look set to inhibit any improvement for years to come. This makes investors’ hunt for income more complicated than ever.

Key takeaways

  • Global growth is low and any improvement this year will be precarious; growth is set to slow further in the next few years.
  • Deflationary forces that emerged during the financial crisis evidently remain at work, and inflation expectations remain doggedly low.
  • Central banks are having to revise their strategy: it is no longer the time to raise interest rates.
  • Rates are set to remain lower for longer, with demographic and economic factors – including an ageing population and reduced productivity – adding to downward pressure on rates
  • Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Investing in the water-related resource sector may be significantly affected by events relating to international political and economic developments, water conservation, the success of exploration projects, commodity prices and tax and other government regulations. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

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