For example, if a company consistently delivered strong earnings over the course of a number of years, it could be the case that investors over-react to further earnings announcements, becoming overly optimistic regarding the outlook for the company, and pushing its stock price to a higher than natural level.
For the second half of this article, we will turn our attention to the topic of sustainability, and how this can be used as part of a wider factor-based approach.
While sustainability is not typically classified as a factor in and of itself, it can instead be seen as an additional lens through which a factor-based strategy can be deployed.
Utilising sustainable screens as part of a wider investment strategy enables an investor to invest more responsibly, while still being able to retain low costs, high diversification and limited tracking error – depending upon the precise strategy deployed and the objectives in place.
Alongside this, ESG information is part of a wider package of information available for companies, with ESG risks being a key area to consider alongside financial and other risks for a firm. ESG risks can be, and often are, material and impactful.
When we think back to the various corporate scandals seen over the past few years; ESG-focused investors may have an advantage in understanding the risk profile in play ahead of the events that transpired – for example through awareness of poor corporate governance structures or poor internal practices.
Sustainable investing itself remains a hot topic globally and in the UK, in part due to the Financial Conduct Authority recently publishing their long-awaited final policy statement for the sustainability disclosure requirements and investment labels regime.
This regulation creates a framework for UK sustainable investment funds, creating four labels of categorisation as follows:
- Sustainability focus: funds investing mainly in assets that are environmentally and/or socially sustainable.
- Sustainability improvers: funds investing mainly in assets that have the potential to improve environmental and/or social sustainability over time.
- Sustainability impact: funds investing mainly in solutions to sustainability problems, aiming to achieve a pre-defined positive measurable environmental and/or social impact.
- Sustainability mixed goals: funds investing across different sustainability objectives and strategies aligned with the other three categories.
While the publishing of this regulation has been broadly welcomed by the industry in light of the regulatory framework around sustainable investing that it will provide, it is clear that there is not a direct link between all of the types of sustainable investing approaches outlined above and the four sustainability labels.
As such, asset managers are currently working hard to determine label suitability across their fund ranges, and how best to adapt to this framework.
The labelling regime will come into force on May 31 this year, with the FCA’s anti-greenwashing rule – applicable to all FCA-authorised firms who make sustainability-related claims about their products and services – also coming into effect on the same date.
This will reinforce that sustainability-related claims must be fair, clear and not misleading, and as such it is important that firms to keep up to speed with this regulation, to ensure compliance ahead of the May 31 enforcement date.
