ESG Investing has increased in size and popularity in recent years. As the category has grown, so too has the need for accurate monitoring of sustainable companies. With this in mind, below is an interview conducted with Andreas Feiner, Founding Partner and Head of ESG Research and Advisory at Arabesque Partners, an ESG Quant Fund Manager.
What is your role at Arabesque and what does Arabesque do?
I am a Founding Partner, and Head of ESG Research and Advisory, at Arabesque. Arabesque is a specialist ESG Quant fund manager that uses self-learning quantitative models and big data to assess the performance and sustainability of globally listed companies. Our investment technology processes over 100 billion data points to select an investment universe of equities with the aim of delivering superior returns; integrating Environmental, Social, and Governance (ESG) information with quantitative strategies. Our partnership is dedicated to taking sustainability into the mainstream by using finance as a catalyst for change and benefit of all.
Can you explain what the ESG data tool is?
Earlier this year, our firm launched Arabesque S-Ray™, a new tool that allows anyone to monitor the sustainability of thousands of the world’s largest companies. Inspired by the impact that the X-Ray had on medicine in the early 20th century, S-Ray is the latest technology of its kind to capture vast amounts of sustainability information that now exists on companies, and make it relevant and understandable to investors.
S-Ray is a next generation transparency lens that can empower all stakeholders to make better decisions for a more sustainable future. It works by systematically combining over 200 ESG metrics with news signals from over 50,000 sources across 15 languages. It is the first tool of its kind to rate companies on the normative principles of the United Nations Global Compact: Human Rights, Labour Rights, the Environment, and Anti-Corruption (GC Score). Additionally, Arabesque S-Ray provides an industry-specific assessment of a company’s performance on financially material sustainability criteria (ESG Score). Both scores are combined with a preferences filter that assesses a company’s business involvements.
It is a platform that combines and aggregates sustainability information from a broad and ever-expanding set of sources, with values-neutral technology built to streamline vast amounts of ESG data in the market.
Why was the tool developed and who developed it?
We believe that ESG data provides a new dimension to investing, giving investors more information than ever before about the DNA of a company. Arabesque S-Ray™ has been designed to move money up the corporate sustainability chain, while improving risk adjusted returns for investors.
Up until recently, many investors have struggled to make sense of sustainability-based approaches. A major reason is that big data around ESG issues has remained scattered, incomplete, incoherent, and unstructured. There has been no uniform measurement or easily applied framework that allows investors to assess corporate performance in alignment with personal values and preferences.
This is where technology-driven approaches such as S-Ray can change the market. S-Ray’s unbiased algorithms harness the power of machine learning, processing big data to produce a daily snapshot of a company’s sustainability. By offering investors a modular way of aggregating relevant sustainability big data, it can help to improve decision making on responsible investment in the long term, a fourth dimension of security analysis.
What are the current existing limitations to the tool?
Until recently, data quality has been a challenge. However, it is improving all the time. Now, more and more companies report on sustainability. We are at the tipping point. Just imagine what will happen if regulators, investors, and stock exchanges push companies to disclose ESG data. It’s the same for accounting metrics: 50 years ago there was no standard at all. This is where we are now in sustainability.
Who can use the tool and how much does it cost?
At Arabesque, we believe in Generation S, a growing movement of people of all ages, cultures, faith, and nationalities who understand the power of sustainability to create positive change. Arabesque S-Ray™ has been built specifically with Generation S in mind, and can be used as a research tool to inform and empower individuals to make better day-to-day decisions and add more value to society.
We see Arabesque S-Ray™ as an easy-to-use tool to increase transparency in the corporate sustainability landscape. While Arabesque is not an ESG rating provider, we hope that by combining our expertise in quantitative technology and sustainability we can help investors, corporations, and all stakeholders obtain a first look into the corporate DNA of thousands of companies.
There are currently three different ways that people can access S-Ray™. There is our standard solution, which is free for anyone to use and explore the sustainability of over 4,000 listed companies, with scores updated daily with a three-month delay.
Arabesque S-Ray™ Pro ($2,500 per annum) is our service which allows each individual user access to the latest S-Ray scores, updated daily, together with access to unique company dashboards, historical data, and sub-scores.
Arabesque S-Ray™ Enterprise ($25,000 per annum) is our multi-user solution for asset managers and investment professionals, providing access to all historically available data in a variety of formats, and all the features of S-Ray™ Pro.
Do similar tools exist?
We believe Arabesque S-Ray is different from other sustainability scores in three ways. Firstly, being an asset manager, rather than an ESG data provider, Arabesque S-Ray™ has been specifically calibrated to help improve investment decisions and risk-adjusted returns.
Secondly, Arabesque S-Ray™ is a technology-driven platform that leverages the power of machine learning to systematically combine a diverse set of data sources, rather than relying on one set of human judgments. The algorithms driving S-Ray are designed to learn over time as new and different types of data sources become available.
Thirdly, to reflect the multi-faceted nature of corporate sustainability, Arabesque S-Ray™ provides three distinct sustainability measurements, instead of one simple total score. The GC score primarily looks at how a company behaves in relation to the UN Global Compact principles. The ESG score provides information on a company’s ability to financially outperform in the long run. The Preferences Filter allows users to find out if companies align with their personal values.
What do you believe to be the future of ESG and ESG tools?
As more people understand that through their investments, they can express their personal values and contribute directly to sustainable development. Finance can now become a catalyst to drive market transformation by directing capital towards more sustainable companies. People all over the world are discovering that money is a powerful driver of change and that their own choices make a difference. The question around ESG is shifting from “Why?” to “Why Not?”
Technology such as Arabesque S-Ray™ will ensure this shift will only accelerate. S-Ray has been built with the objective of taking sustainability into the mainstream by making it available in a cost-efficient and practical way to everyone. Through transparency, it has the power to move money from the bottom of the ESG value chain to the top, helping investors to take action, and requiring corporations to think about their future place in that value chain. Truly, sustainable finance.
Why did you first get involved with ESG investing?
I started my career in equity research and equity asset management. I was at Barclays and started work on a strategic projects team, which is how we started Arabesque in 2010. I remember a large client said to us at the time, that you probably can’t combine values investing with performance.
Intuitively, I think it’s completely the other way around. Companies that are managed well perform well. If you run a company and take into consideration more than your short-term shareholders in your decision-making, your company should be more resilient. It should be less risky and make more money. But it was really difficult to find a product that does that, so we came up with a specific plan, and it was eventually made part of Barclays’ asset management business. In 2013, through a management buyout, we then established Arabesque independently.
Looking forward 5-10 years, what excites you most about ESG investing?
Machine learning is shaking up the world of finance. What was once the preserve of technology firms, the financial industry – from innovative new fintech firms to the giants of Wall Street – is starting to apply the technique to everything from fraud protection to finding new trading strategies, promising to change the global market landscape forever.
This paradigm shift, coinciding with the rapidly increasing demand for ESG products, is incredibly exciting. As more and more corporate sustainability information flows into the market, and as its material value is more understood, machine learning and big data are enabling a new, quantitative approach to ESG. It is opening up a new dimension of security analysis, and a new dimension of investing.