Following the launch in mid-April of Arabesque S-Ray, a new tool to monitor the sustainability of over 4,000 of the world's largest corporations, SRP spoke to Andreas Feiner, head of ESG research and advisory at Arabesque, about how the ESG segment is moving forward bolstered by technology applications, the firm's partnership with Deutsche and its first foray into the US market.
Arabesque S-Ray is designed to streamline "vast amounts" of environmental, social, and governance (ESG) information into one easy-to-use, smart application, says Feiner, adding that the unbiased diagnostic technology processes countless data points to evaluate companies in three ways including a normative assessment of each company based on the core principles of the United Nations Global Compact (GC Score); a sector specific analysis of each corporation's performance on financially material ESG issues (ESG Score); and a search tool that allows anyone to check the business involvements of companies against their personal values (Preferences Filter).
"Its name is inspired by the impact of the X-Ray on medicine, as through the transparency of data, it enables all stakeholders to look beneath a company's surface," says Feiner. "Arabesque S-Ray describes the sustainable investment process for our ESG Quant strategies, Arabesque Prime and Systematic. And given the firm's mission to take sustainability into the mainstream by making it available in a practical and cost efficient way, we are sharing the technology."
According to Feiner, if you provide investors and wealth managers with data, "you empower them to make more informed decisions, therefore allowing them to be more pro-active with the assets they are exposed to in their portfolios".
"We are providing a tool that can be used to bring transparency and granularity around all activities of corporations, which ultimately increases opportunities to shift capital towards those companies which consider the interests of all stakeholders," says Feiner, adding that whilst S-Ray is not aimed at a particular set of products, the structured products market could benefit by adding extra transparency to the assets underlying products.
For a company to be included in Arabesque's investment universe, they have to be compliant with the principles of the UN Global Compact - the world's largest corporate sustainability initiative.
"Companies we select must not only meet the UN rules in relation to human rights, labour rights, the environment and anti-corruption, but also must not violate them in any way," says Feiner. "S-Ray harnesses the information of 200 ESG metrics with news signals from over 50,000 sources across 15 languages, providing a normative assessment of each company based on these core principles though a GC Score (0-100). In other words, allowing you to see how well a company behaves."
The second element taken into account when evaluating the sustainability of companies is ESG performance, "which is the fourth dimension of security analysis or the 'DNA' of the firm".
"S-Ray provides a sector specific analysis of each company's performance on financially material ESG issues," says Feiner. "Every company is scored within the context of its industry environment, based on factors that have a significant relationship with future financial performance. The result is a proprietary ESG score (0-100) for each company, providing an assessment of long-term financial performance. In other words, how a company is run."
The third pillar of S-Ray - the Preferences Filter, looks at what goods and services a company is producing or offering. "We don't apply our own view on the business involvements of a company, but simply bring transparency to the process through the filter," says Feiner. "For example, an investor will be able to see that a given car manufacturer could be making 5-10% of its revenue by selling weapons. So if you don't want any weapons in your portfolio you can exclude these companies."
According to Feiner, the S-Ray technology has been developed in house using self-learning quantitative models and big data to assess the performance and sustainability of companies which will inform several indices that are being developed as part of the firm's partnership with Deutsche Bank to expand the bank's ESG structured products offering which will be "offered through its retail structured products distribution network but also through its insurance product range.
The Deutsche Bank range which was launched in June 2016 is targeted at a mix of retail structured products investors and institutional investors seeking to get unfunded exposure to synthetic investments using the Arabesque processes.
The German firm is also expanding into the US market with the launch of its Arabesque Systematic USA fund which applies Arabesque's strategies to all publicly listed US equities. This will be followed by a second fund, the Arabesque Systematic International Fund, which considers listed international, developed market equities, according to Feiner.
"Our focus is on the mutual fund sector because it is similar to what we already do under the Ucits framework in Europe, and we are pleased to have already secured seed investment from a registered investment adviser (RIA), Gitterman Wealth Management," says Feiner, adding that although in the US structured products "are not as big a topic as they are in Europe, we believe, however, that there is scope to deploy our strategies in the index annuity segment".
"It's a very interesting market to promote what we do around the integration of ESG and risk management," says Feiner. "I am confident that in the current environment we have a very interesting proposition for product developers and investors alike. The US is embracing sustainability in a big way, with demand for ESG solutions increasing rapidly."
The new Arabesque S-Ray is available to the general public for free with a three-month data delay. The firm also offers a Pro version - a paid subscription service (US$2,500 per annum) with access to daily information, an in-depth dashboard on each company, and download functions; and an Enterprise version for asset managers and professions will also be available ($25,000 per annum) with multi-user access and the ability to access historical data.
Arabesque S-Ray is providing an entry point to sustainability, according to Feiner. "This is a sophisticated portfolio construction tool that can be integrated in the investment process as an additional line item or as a risk management tool," says Feiner. "We believe this will bring added transparency and people will be able to see those scores before making investment decision, and to manage their existing positions. We intend for it to create a feedback loop between investors and companies."
According to Feiner, Arabesque has already been involved on a number of developments in the index segment (DB indices) and have already sold the tool to the German Society for Security Analysts which comprises more than 100 German analysts, and other consultancy firms. In addition, Arabesque has begun talks with an index provider "which has shown interest in integrating our new S-Ray for some of their indices".
"We think this will also open up new opportunities for us in the US market," says Feiner.
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