The Mackenzie Quantitative Equity Team: Our approach towards responsible investing

Philosophy: ESG factors to enhance alpha and mitigate risk

The Global Quantitative Equity team’s philosophy is rooted in a disciplined, data-driven approach to investing. This also applies to the team’s Environmental, Social and Governance (ESG) integration approach. Mission critical for the team is to identify ESG-related factors that they believe enhance alpha and address risks across the market.

The investment team systematically incorporates ESG factors in its stock selection model with the belief that it enables exposure to companies with stronger ESG characteristics and an additional factor to add alpha for the portfolio, as companies that are focused on sustainability typically possess favorable quality characteristics.

“ESG matters throughout the world! For us, it means favoring companies with better ESG performance than industry peers”

Arup Datta, MBA. CFA,
Senior Vice President, Head of Team Mackenzie Global Quantitative Equity Team

How the Mackenzie Global Quantitative Equity Team integrates ESG

The Mackenzie Global Quantitative Equity team follows a 3-step process for integrating ESG into its highly disciplined stock selection process.


Factor identification

ESG materiality is different from industry to industry as demonstrated by the Sustainability Accounting and Standards Board (SASB). Therefore, the team collects industry specific ESG data points from sources such as S&P Trucost and Bloomberg. As part of their quantitative investment process, the team prefers these data vendors – as opposed to ESG rating providers - as they provide both breadth of global coverage and granularity of data per company.


Identifying alpha

During the research process, the team back tests ESG factors that are considered to be fundamentally material for each industry. In other words, companies are assessed against peers to verify if strong ESG characteristics have historically led to better risk-adjusted returns. ESG factors that are identified to provide enhanced alpha – based on historical back tested data – are integrated into the stock selection process. In addition, the team has identified that back test results of ESG data on alpha enhancement may differ across geographic regions.


Systematic integration

Based on the conclusions from the back tested data, the team systematically integrates these alpha-enhancing ESG factors into its stock selection process using a proprietary ESG scoring framework. As a result, this approach leads to gaining exposure to companies with stronger ESG characteristics relative to industry peers. This step of the process does not lead to industry tilts. Depending on the region and industry, the number of ESG data inputs may vary. In general, ESG has a significant weight of up to 10% in the overall alpha model.

Importantly, the team has a capacity to manage the overall portfolio sustainability characteristics subject to the mandate’s ESG guidelines. This may include managing the portfolio according to a carbon budget, excluding controversial industries, avoiding companies involved in controversies, etc. The investment team collaborates with Mackenzie Sustainability Centre of Excellence to stay abreast of the growing ESG data landscape and to comply with sustainability requirements from clients.

The Mackenzie Global Quantitative Equity Team’s ESG approach in action

Case study: Ball Corporation vs. Packaging Corporation of America

As of 12/31/21, one of the companies that receives high proprietary ESG score is Ball Corporation (ticker BLL). The company belongs to the US Containers & Packaging industry. The high ESG score of Ball Corp is driven by its strong environmental and governance scores that have proven to be a material driver of stock performance. In the environmental category one key factor among others that underscores Ball Corp’s outperformance is its below industry median carbon emission intensity. What contributes to its high governance score is the usage of a staggered board system. Relative to the strong environmental and governance score, Ball Corp’s social score is weak mainly driven by its low community spending budget. In contrast to Ball Corporation’s high ESG score, another company in the US Containers & Packaging industry, Packaging Corporation of America (ticker PKG), has a poor proprietary ESG score, which is driven by its underperformance in the environmental category, in particular its high carbon emission intensity. The stronger ESG credentials of Ball Corp make it more likely for the team’s stock selection model to receive an allocation into the portfolio than Packaging Corp.

Learn more about the Mackenzie Global Quantitative Equity team’s funds here.

 

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