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Alpha-Centric ESG Research

Kyle Rudden

When there's an elephant in the room, it's best to acknowledge it.
So let's be honest, ESG (Environmental, Social, Governance) is an intensely loaded acronym. Not so much for zealots and spinmeisters, but among portfolio managers the mere mention of those three letters – a four-letter word to some – can quash civility and raise the temperature in a room.
But who doesn't love a good debate?
I am excited to bring my unapologetically alpha-centric ESG research to Smartkarma. As a former sell-side analyst, I'm a staunch proponent of independent research. Moreover, I trust ESG's ability to create value at the security level and, sometimes, generate alpha at the portfolio level.
<ul>
<li>
Security Level: ESG analysis aids in securities selection, and ESG-focused issuers can reduce various types of risk and contribute to top- and bottom-line gains; all steps toward alpha.</li>
<li>
Portfolio Level: In addition to clear beta benefits (lower volatility, reduced fat tail risk), ESG integration can potentially (an operative word I'll clarify later) generate "ESG Alpha."</li>
</ul>
My views are based in experience, not religiosity. They are seeded in harsh early-career lessons in ESG-related risk (a class in governance from Enron, anyone?), and rooted in a decade researching ESG's links to risk-adjusted equity returns, credit ratings, cost of capital, and yield spreads.
Initially, I struggled with whether to lead off with an "introductory" piece. The world doesn't need another prosaic ESG primer, but I felt a need to provide some context since ESG is a new angle on Smartkarma, and my views – more pragmatic than idealistic – don't always toe the ESG party line.
So, here it is, my introduction. Not to ESG per se, but to ESG and us – you, me, Smartkarma.
The goal of this report is simply to lay a basic foundation for future research. It leans informal, but I do have a few specific objectives (which can also be considered a rough outline):
<ol>
<li>Explain what I mean by alpha-centric ESG research, and what to expect from my research</li>
<li>Briefly share the strange backstory to my ESG career, as insight into my ESG philosophy</li>
<li>Offer observations (some cautionary) about certain kinds of questionable ESG "research"</li>
<li>Discuss the holy grail, ESG Alpha, from a theoretical point including its major challenges</li>
</ol>

When there's an elephant in the room, it's best to acknowledge it.
So let's be honest, ESG (Environmental, Social, Governance) is an intensely loaded acronym. Not so much for zealots and spinmeisters, but among portfolio managers the mere mention of those three letters – a four-letter word to some – can quash civility and raise the temperature in a room.
But who doesn't love a good debate?
I am excited to bring my unapologetically alpha-centric ESG research to Smartkarma. As a former sell-side analyst, I'm a staunch proponent of independent research. Moreover, I trust ESG's ability to create value at the security level and, sometimes, generate alpha at the portfolio level.


Security Level: ESG analysis aids in securities selection, and ESG-focused issuers can reduce various types of risk and contribute to top- and bottom-line gains; all steps toward alpha.

Portfolio Level: In addition to clear beta benefits (lower volatility, reduced fat tail risk), ESG integration can potentially (an operative word I'll clarify later) generate "ESG Alpha."

My views are based in experience, not religiosity. They are seeded in harsh early-career lessons in ESG-related risk (a class in governance from Enron, anyone?), and rooted in a decade researching ESG's links to risk-adjusted equity returns, credit ratings, cost of capital, and yield spreads.
Initially, I struggled with whether to lead off with an "introductory" piece. The world doesn't need another prosaic ESG primer, but I felt a need to provide some context since ESG is a new angle on Smartkarma, and my views – more pragmatic than idealistic – don't always toe the ESG party line.
So, here it is, my introduction. Not to ESG per se, but to ESG and us – you, me, Smartkarma.
The goal of this report is simply to lay a basic foundation for future research. It leans informal, but I do have a few specific objectives (which can also be considered a rough outline):

Explain what I mean by alpha-centric ESG research, and what to expect from my research
Briefly share the strange backstory to my ESG career, as insight into my ESG philosophy
Offer observations (some cautionary) about certain kinds of questionable ESG "research"
Discuss the holy grail, ESG Alpha, from a theoretical point including its major challenges


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