ENGAGE18 Q&A: How Technology is Fueling the ESG Revolution

Arabesque’s Andreas Feiner, Head of ESG Research and Advisory, discusses the drivers behind investors’ growing appreciation for sustainability.


Q: In terms of an introduction, can you talk a bit about Arabesque and, in particular, the firm’s thesis around sustainability?

A: Arabesque was founded on the mission to help mainstream sustainable investment strategies. Since our management buyout from Barclays five years ago, we’ve tried to become a conduit and vehicle for asset managers of all stripes to incorporate sustainability into their processes. And we’ve found that across the broader asset management industry, the level of interest has only grown as the market understands that ESG (environmental, social and governance) is in fact “performance relevant.”

There is still this notion, though, that sustainability is about the goods or products being produced or sold. This misconception goes back to the SRI (socially responsible investing) filters that have been around for a long time and were generally used to help people avoid investments in certain “sin” industries, such as alcohol or tobacco. Adding to the confusion recently has been the growth of the impact investing space, which is more aligned to meeting philanthropic objectives and typically isn’t additive to performance. ESG, though, should be viewed as a way for investors to gain a more complete picture around a company’s opportunities and potential risks, and serves to reinforce and improve returns.

Sustainability, as we think about it today, is about three things: environmental stewardship, social inclusion and sound governance. Each of these factors supports economic value creation, collectively, and serve as a foundation for transparent and principled markets. So, as investors begin to look at these areas more closely—to reduce risk and improve stock selection—we can begin to quantify how these factors improve performance. In fact, to put a number on it, our data shows that by incorporating ESG analysis into the investment process, it can add between 50 and 100 basis points per annum to returns and imparts a slight reduction in the overall risk. In a low-rate environment, this is not immaterial to total returns and it more than offsets any additional fees required to incorporate these kinds of ESG capabilities into an investment strategy.

Q: There has certainly been a budding interest in ESG strategies judging by the media coverage. But where would you say the movement currently stands with the investment community and what are the catalysts that will drive it forward?

A: I think sustainability has already entered the mainstream consciousness, but from a practitioner’s perspective, there is far more currently being written about ESG than is being done to integrate these factors into investment strategies.

One of the biggest catalysts, though, has been the interest from the general public and from millennials in particular. They want returns, but there is far more scrutiny, today, into how those returns are produced and whether companies are representing themselves as good corporate citizens. There is also more demand from institutional investors—the asset owners, pension funds and signatories of the PRI (Principles for Responsible Investing). They are serving their constituencies but also recognize the positive effect of ESG on performance. And the corporations, themselves, have become more aware. Our Chairman, Georg Kell, was the founding Executive Director of the United Nations Global Compact, which counts over 9,000 corporate signatories and is the world’s largest voluntary corporate-sustainability initiative. All of this has helped the movement reach critical mass.

The regulators are now getting up to speed and over the past two years alone, there have been close to 300 different rules introduced around sustainability and corporate governance. This drives the collection of information, which has a synergistic impact. With data, investors can find an edge to drive outperformance. That attracts more capital to sustainable strategies, which ultimately benefits those companies that are managing these risks and being attentive to ESG considerations. The original catalyst might be about doing good, but for hedge funds and the broader asset management industry, it’s about generating better risk-adjusted returns.

Q: How would you characterize the state of ESG data today? How has it evolved over the past decade and where do you see it going over the next five years?     

A: If you think about how ESG data has evolved, there has been some considerable progress with the growth and maturation of big data capabilities. ESG data, in the beginning, was generally “survey-based” information. You’d have the CSR teams within companies answering detailed questions in long-form text. It was valuable in that it got companies thinking about corporate social responsibility and their impact on the environment and within their communities. That being said, this data didn’t really tell investors too much.

From an investment perspective, what companies say about themselves tends to be far less valuable than hard data that is quantifiable and facilitates fundamental analysis to distinguish the signals from the noise. With big data, today, fund managers can leverage tools capable of detecting ESG factors across 50,000 different sources, in 15 different languages. These kinds of capabilities provide insights into risks such as corruption or human rights abuses that weren’t available before. And the output, since it’s not coming from the companies’ marketing teams, is far more credible.

In terms of how this data will evolve, the greatest advances will likely occur at the nexus of artificial intelligence and big data. The ongoing growth in the volume and variety of ESG data, coupled with the development of AI and machine learning capabilities to optimize how this information is managed and utilized, will ultimately make ESG analysis accessible to a wider population of investors. Right now, though, there is a real advantage available to those who can access and apply this information.

Q: So how can investors get this data and integrate it into their strategies?     

A: I’ll talk about this in more depth at ENGAGE18, but we have an alliance that makes Arabesque’s ESG data available to users of Eagle’s Data Management solution. And it’s actually very inexpensive now to integrate this information into an investment strategy. Our S-Ray tool, for instance, assesses over 200 different ESG metrics and provides a composite score based on how well each company upholds the principles of the UN Global Compact. The tool can also conduct an industry-specific assessment based on available, and financially material, sustainability criteria. This data is also available over a free web platform, but enterprise subscribers can get daily updates on over 7,000 companies, representing 90% of the global market capitalization.

If you watch the news today, you can’t help but see how this information drives performance. Whether it’s the governance issues that have affected some of the higher profile technology stocks recently or the environmental catastrophes that continue to weigh on certain energy names, all of this underscores why ESG factors are being integrated into fundamental analysis. And the growing focus on sustainability actually represents one of the more exciting areas in which technology is changing the investment landscape. It will provide a real opportunity for those who recognize how it will impact the global markets in the years ahead.

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