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ESG Analytics: Data availability and new tools on the horizon

10/02/2019

In our previous blog posts, we have talked about scepticism around responsible and sustainable investing as well as how it has been impacted by wider trends in the investment world, such as the popularity of passive investing and emergence of ETFs. We also covered issues such as worries around sacrificing returns, but what happens when we get slightly more granular with ESG factors and the sustainable research process?

‘Big Data’ has undoubtedly shaken up numerous global industries, from logistics to retail to media and many more. Behavioural data analytics are increasingly being used for R&D, sales and marketing, and other business functions and processes. Investment is of course no different, and quant tools have played a vital role in it for many years. It should come as no surprise then, that the whole spectrum of responsible investing (from ESG to impact investing) is also very reliant on data, including company disclosures, voting records. Some say ESG-specific performance metrics are still in their infancy – quite a contrast to the financial statements and annual reports that analysts have incorporated into their research process for years. However, there is a universe of tools out there to help professional investors get their ESG data.

ESG Research and analysis is likely to comprise some form of analysis of regulatory filings, and public data, as well as company reports. In addition to these resources, sustainability research firms and ratings agencies such as Sustainalytics are becoming a major force in the market. MSCI compiles its own ESG ratings, and agencies such as Vigeo Eiris are providing in-depth data to professional investors around the world.

In the Netherlands, institutional asset manager APG, a subsidiary of the country’s National Civil Pension Fund (the pension fund for government and education employees) recently announced the use of artificial intelligence to identify innovative opportunities for investing in companies that contribute to solving climate change, education and healthcare issues among others.

In Japan, Hiro Mizuno, executive managing director of the country’s Government Pension Fund (who is also the world’s largest investor), gave a keynote presentation at a conference emphasising the potential of AI and machine learning in mining large amounts of environmental and similar data to make evidence available to investors in real time.
AI-powered analytics could be particularly useful in impact investing, where measurement of impact and relating outcomes to particular goals is crucial. Measuring third party data (as opposed to self-reported), US-based Distilled Analytics says it has the ability to measure the non-financial risks and impacts of particular investments through AI-driven research in addition to human analysis.

Of course, we have barely begun to explore the full potential of artificial intelligence, and many ESG integration processes use a combination of quantitative and qualitative factors – one frequently used approach is to benchmark on quantitative factors and then overlay qualitative or ‘subjective’ factors – this is often to ensure that the investments reflect the beliefs or values of the investor(s), though this is in no way guaranteed. The parts of the ESG research process that are driven by formulas or ratings, and the extent of subjective judgement applied by analysts will of course vary with every asset manager. While there may be companies that are more or less universally viewed as ‘bad actors’ in either E, S, or G, for some (such as Tesla, for example) their rating is hotly contested. This means that qualitative judgement is welcome – especially if analysing whether a specific investment has had a particular impact or outcome.

For our Responsible Investment Review report, we have interviewed over 60 experts, including around the topic of tools and methodologies fund managers rely on to construct ESG funds, and what investors who are keen on aligning their investment with their values of beliefs might expect. For more on benefits and downsides of different ESG research processes and to find out more about the report, please get in touch with the team by email here.

Is ‘sin’ unsustainable?

01/02/2019

 

For many, the end of Dry January will be met with cheers, clinking of glasses and a collective sigh of relief that one can now console oneself with a soothing ale or glass of red when cold weather bites.

Yet longer-term trend data tells us that the proportion of Brits drinking, or drinking to excess, is falling. As outlined in a recent MoneyWeek article on the subject, young people are especially inclined towards teetotalism or infrequent drinking. A country renowned for its binge drinking culture cutting its alcohol consumption could spell trouble for big multinational drinks companies Anheuser-Busch InBev and SABMiller, as well as national pub brands like J D Wetherspoon and Greene King. True, the multinationals also have portfolios of soft-drink brands, but these are vulnerable to growing anti-sugar sentiment and already have the UK’s sugar tax to contend with.

Traditionally, ethical fund managers may well have screened out alcohol producers. Today, there is arguably a financial imperative to at least limit exposure to these companies. A heat wave or a World Cup may temporarily boost consumption but longer term, people are much more concerned about the health risks of sugar and alcohol, and regulation is reinforcing the trend.

The same is true of smoking: tobacco may no longer need to be screened out on ethical grounds; it could simply make good financial sense to do so. Good news for the 22% of private investors who reported to us that they have actively looked to avoid or minimise investment in tobacco. According to the Office of National Statistics, only 15% of UK adults smoked cigarettes in 2017, with more than 900,000 having quit both smoking and vaping.

So the stats say that sin is going out of style. What are younger generations spending their time and money on instead? Fund managers have not been blind to the growing popularity of cycling, spin classes and other athletic endeavours, nor the desire to at least look as if you’re on your way to a gym session, even if your destination is a café. Alan Rowsell, manager of Standard Life Investments’ Global Smaller Companies fund, attributes some of his fund’s success to the “athleisure boom”. Columbia Threadneedle’s American funds seek to capitalise on the trend, investing in companies like Nike and Lululemon Athletica. Countless others are undoubtedly investing with a similar frame of mind.

Investing in athleisure is just one example of sustainable investing that fund managers probably do without thinking of it as such or undertaking explicit ESG analysis. Of course, companies like Nike are not 100% virtuous, having been one of many to be shamed in the past for tolerating sweatshops. Yet having been shamed in the early noughties, first by the press and then by the public, these companies are now compelled not only to be more vigilant of working conditions in factories abroad, but also to improve their stakeholder engagement. Nike has certainly got its sustainability reporting act in gear.

Even the NHS is getting in on the athleisure game… sort of. Its weight loss programme aimed at tackling obesity and Type 2 diabetes (part of the recently-launched NHS Long Term Plan) includes wearable technologies. More broadly, it is putting pressure on the food industry to help battle the bulge costing taxpayers billions every year.

With all this in mind, it’s fair to make the case that what’s healthy for your body may be healthy for your investment portfolio as well.

Our upcoming Responsible Investment Review will look at the current size and growth potential of the responsible and ESG investing landscape in the UK. Spanning various audiences, from financial advisers to private investors and institutional investors, we hope to have succeeded in establishing to what extent this previously ‘niche’ investment philosophy has disrupted the investment management industry.

For more info email us here

 

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