Sustainability in Asset Management
Supporting the full value chain of asset management when sustainability factors matter
ESG means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced there are with sustainability.
Environmental factors include the contribution a company or government makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency.
Social include human rights, labor standards in the supply chain, any exposure to illegal child labor, and more routine issues such as adherence to workplace health and safety.
Governance refers to a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of corporations.
ESG has been the first sustainability scoring concept, which has been early adopted by large index providers (e.g. S&P Dow Jones Indices launched 1999 the Dow Jones Sustainability World Index).
SDG is a newer sustainability scoring concept initiated in 2015, which has been driven by the Division for Sustainable Development Goals (DSDG) in the United Nations Department of Economic and Social Affairs (UNDESA).
“The 2030 Agenda for Sustainable Development, adopted by all United Nations Member States in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries - developed and developing - in a global partnership.”
DOES SUSTAINABILITY MATTER?
By analyzing corporate sustainability, investors can gain a better understanding of a company’s quality of management and future performance potential. This, in turn, enables investors to identify investment opportunities that can generate long-term shareholder value.
In short, a focus on sustainability leads to better-informed investment decisions.
ESG & SDG DATA
The sustainability data challenge
The number of data providers for sustainability ratings is already quite large (e.g. S&P Dow Jones, Reuters/Refinitiv, Sutainalytics, Inrate, etc…). Since the underlying classification concepts differ, the main question is: How comparable are the ratings and how do these impact the performance of the investment portfolio?
OpenMetrics offers a “Data Agnostic” approach
Regardless of the ESG & SDG data provider choice, we can incorporate any data provider into our Strategic and Tactical Asset Allocation Framework and asses the effects of applying different ratings to the investor portfolio.
The main advantages for customers, of separating data provision from investment management is the full independence from data providers and the flexibility to use the investment models of choice. In addition, this creates a much higher transparency than just using “packaged” rating and investment solutions.
ESG EXCLUSION CRITERIA
Exclusion criteria enable investors to align portfolios with norms and values. These criteria can be the individual values of the owners on the one hand, and global guidelines such as the ten principles of the United Nations Global Compact on the other.
Within the various sustainable investment approaches, exclusion strategies continue to be the most frequently used. A proper screening process provides the information necessary to exclude investors and thus minimize image and reputation risks for investors.
ESG/SDG integration is the process of analyzing all material factors in investment analysis and investment decisions, including environmental, social, and governance factors.
A key component of ESG/SDG integration is reducing risks and/or generating returns. Many investors have turned to ESG/SDG factors as another potential way to avoid risk in an individual company or sector or to explore investment opportunities.
Another key component is materiality. ESG/SDG integration involves integrating only the material components, which are considered to affect corporate performance and investment performance.
Measuring sustainability impact helps investors to quantify and communicate the environmental impacts of their portfolios to beneficiaries and stakeholders.
Thus, enables investors to make better-informed decisions on how to adjust their portfolios in order to maximize the positive impacts and minimize the negative impacts of their investments.
There are various impacts that could be measured through the application of sustainability criterias. In the following are some examples.
In the past the SDG impact of a certain company was usually derived from ESG data. This process has become more and more standardized by ESG/SDG data providers such as MSCI (SDG revenue exposure) or Sustainalytics (SDG goal achievements).
Thus allowing not only to define SDG impacts as goals for the resulting investments; but also allowing to use them from the beginning for screenings, thematic selections and/or exclusions.
Sample ESG Impact Analysis:
Risk-Adjusted Returns Impact:
It has long been argued on wheter sustainable investments lead to better risk-adjusted returns. This depends very much on the exclusion and/or inclusion criterias. The following graphic shows an example for a case where an exclusion would actually lead to better risk-adjusted returns:
INVESTMENT PROCESS SUPPORT
There is a wide range of different views around the potential outperformance of sustainability driven investments. However, when comparing large benchmark equity indices, the differences between the ESG and the non ESG versions are negligible (e.g. S&P 500 & S&P 500 ESG).
Therefore, it is of utmost importance to assess the effective impacts of any sustainability filter on the investor portfolio, when working on index and especially on single equity level.
OpenMetrics Solutions supports the full value chain from an asset managers perspective when it comes to implement an ESG & SDG investment process.
From assessing sustainability data from different providers, over incorporating the data into a state-of-the-art asset management toolchain to implement an ongoing monitoring and reporting process.
A new perspective
Traditionally an investment process has a certain risk and return goal at its core. We think that it is important to align any ESG/SDG considerations with those goals and to visualize the impact of those considerations on the possible solution space regarding risk and return.
Therefore, we understand ESG/SDG considerations as additional objectives or constraints in a traditional portfolio design process. This gives us the following unique possibilities:
Visualize how much the solution space shrinks through the exclusion of assets.
Visualize the ESG/SDG scores for all possible portfolios within the remaining solution space.
Defining the desired ESG/SDG score for the portfolio alongside the desired risk and return, either as constraints or as main objective.
Once a portfolio has been found that satisfies all the needs it can be examined for ESG/SDG contributions (similar to return or risk contributions).
In contrast to a strict exclusion scheme to achieve a minimum ESG/SDG score, this procedure does also allow to reduce the extent of the exclusions and choose the weights of the investments such that a certain ESG score is achieved.
CONCLUSION / OFFERING
OpenMetrics offers - among others - customized solutions for:
ESG/SDG index and universe constructions (stocks and issuer based)
Materiality analysis of ESG/SDG
Full scale ESG/SDG valuation and visualization tool development based on open source tools
Regular reporting, data management and maintenance
Portfolio and risk analytics for sustainable (ESG/SDG) & traditional investment funds
ESG/SDG - Applications
All our solutions are data vendor and technology vendor agnostic. This approach gives us access to all major providers and allows us to take advantage from all future developments.
Therefore, we can ensure that our customers have always access to the most advanced ESG/SDG applications.