The ESG investing movement – which promotes the factoring in of relevant non-financial data into investment decisions – is gathering momentum, led by a small but growing number of asset managers.
Arabesque Partners is one such company looking to lead the way to a sustainable economy through an innovative rules-based, technology-enabled approach to integrating ESG into investing.
Michael Harvey recently caught up with Andreas Feiner, Head of ESG Research and Advisory at Arabesque Partners, to talk about ESG investing, human values, bias and robots.
Arabesque Partners was born out of a client-driven initiative at Barclays that sought to find a way to combine ‘finance with a purpose’ into investment strategies without sacrificing returns or incurring higher risk. The result was the creation of the first ESG quantitative asset manager. Arabesque’s unique approach leverages ESG data, exploits behavioural biases and capitalises on technology to execute its strategies.
At Arabesque the investment process begins with the definition of an investment universe, made up of stocks that have passed through a combination of liquidity, forensic accounting, UNGC, ESG and balance sheet screens. Investors can choose from two investment strategies; one based on a subset of stocks from the investment universe selected by Arabesque’s rules-based fundamental analysis. The other is a subset of stocks from the investment universe, but this time selected by Arabesque’s quantitative stock selection and portfolio optimisation technology.
I was interested to find out more about the benefits of such an approach. According to Andreas, “The purpose of using ESG is to make money for the investor. We believe that a company that is good at the management of environmental, social and governance risks should be a better company to invest in and work for. This is our major thesis and we proved that on average our sustainability process brings a 1.5% additional return per annum.”
Arabesque places significant emphasis on technology to both conduct analysis and execute the investment strategy. Decisions to trade, and in which companies to trade in, are made by automated programs. Andreas sees the main benefit of this approach as the overcoming of human psychology. “If you look into behavioural psychology the one big enemy in finance and investing is emotion. You should have a strategy and a plan for what you do depending on the market environment. Most people have a strategy, but executing it is quite difficult. If you have a computer it helps you to keep the investing discipline. Technology is used as a tool to leverage our time and remove the emotional element, which to us is a good thing. Increasingly it less possible for humans to be involved in the analysis – just look at the amount of data points that are available – it’s too much for a human to digest and make the best possible decision for clients.”
Given the key role of technology in the company’s approach it may be tempting to think that the human element is stripped out of the process entirely, however the picture is more nuanced than that. According to Andreas, “The meaning of Arabesque is geometric art derived through mathematics and we are clear that a rules-based approach is at the foundation of everything we do. However, we also see the company as a sort of human arabesque. There are different people from different backgrounds and cultures and views coming together with the same goal to mainstream ESG. The element of being human in how we run the company is very important – we need that diversity and difference of thought and in many ways the application of technology can be seen as an expression of human values as well as a way to overcome human limitations. Companies are nothing more than amalgamations of people coming together with one goal to deliver goods or services, to make a living and to pay some dividends to the investor – it’s a selection of contracts that binds everything together. Although we use computers to leverage our time and execute our model we are very aware of the human element i our company.”
Much has been made of the growth and potential of ESG investing, with 86% of global stock exchanges now offering sustainable indices and 80% of studies showing that stock price performance is positively correlated with sustainability. Yet the proportion of total assets under management that is sustainably invested still remains in the minority. Andreas suggested that becoming mainstream is both, “the biggest challenge and opportunity,” and is upbeat about the prospects – “I believe we are at a tipping point.
Look at the growth in number of companies reporting against the GRI, the proliferation of sustainable stock exchanges, increasing attention from investors, new business models predicated on positive impacts and growing awareness in the general public.
These are all drops in the ocean but something is brewing – to my mind it is not a question of if you do it but rather when, how and with whom? Within the next 10 years the ESG or SRI topic will either vanish or be combined into the standard extra-financial dimension of analysis. It will be taught as a core part of fundamental analysis – even the CFA is incorporating it and they are not an agenda-setting body.”
Arabesque has a clear ambition to support this transition through innovating on approaches to integrating ESG investment into traditional financial analysis and increasing understanding of ESG products all the way to retail investors. This may seem like a daunting task given the scale of the challenge, but as Andreas puts it, “This will be a great journey and good fun!”