In the second part of an interview as part of a series of articles covering developments in the ESG segment, Andreas Feiner, head of ESG research and advisory at Arabesque, talks about the firm's plans to establish a working framework to target structured products manufacturers with new ESG strategies and how the firm could capitalise on the changes in indexing as proprietary indices developed by investment banks face increasing regulatory restrictions.
Beyond the partnership with Deutsche, Arabesque is working to establish a working framework to develop new strategies, and a range of indexes that are investable and can be deployed in different formats such as ETF and structured notes, according to Feiner.
"We have no preference as of how these strategies are used, but we think these partnerships will be able to deliver underlying strategies that will resonate with retail investors. The goal is to see investors including strategies in their portfolios that are based on Arabesque's S-Ray sustainable investment process for our Arabesque Prime and Systematic strategies. This will make their investments compliant with the principles of the UN Global Compact - the world's largest corporate sustainability initiative. This gives us a unique selling point, as no other asset manager is providing UN Global Compact compliancy scores."
Arabesque is also seeking to capitalise on new opportunities in the US listed market, and also in the German domestic structured products market "as there are a number of product propositions such as notes, and index-linked annuities that lend themselves to our strategies", according to Feiner. "We have already developed relationships in Europe with index (Solactive) and product providers (Deutsche Bank), and we want to replicate that approach in the US. We are currently considering our options in terms of partnerships with product manufacturers."
Feiner believes that regulatory pressure and the flight towards transparency has forced providers to seek alternative ways to manufacture their products. "We have seen how some investment banks had to offload parts of their index capabilities because of conflicts of interest," he says. "This has opened up opportunities for firms such as Arabesque as we can provide some of the building blocks as well as a neutral approach. Originally, banks would have developed this kind of initiative in-house but nowadays there are a number of considerations and partnerships can make sense."
According to Feiner, ESG is here to stay and will continue to develop as the number of options "to grow your share or expand your activities" have increased.
"We have seen recently MorningStar increasing its stake in Sustainayitics, and this is not because they don't have the capabilities but because Sustainalytics has made a name for itself in the market and is a reputable business in the ESG segment," says Feiner. "We are not seeking that kind of approach but we would consider partnerships if they add value to what we offer."
Arabesque uses Solactive as a calculating agent to retain its intellectual property (IP) completely independent from the administration work any index provider has to do, according to Feiner.
"The admin part is a low margin high volume business, which is not where we want to go," says Feiner. "Our business model is not to be a competitive outfit to index providers but to leverage our unique strategies to create indexes, and act as a service provider to index providers to deliver value to the end investor."
According to Feiner, one of the main drivers of ESG activity comes on the back of people realising that that ESG is "performance relevant", and investors are using ESG "as a fourth dimension for security analysis, as this is not available on the balance sheet of firms".
"Having access to that kind of information is making investors realise that they can be more selective and base their decisions on a significant amount of data that was not available in the past," says Feiner. "The things we can do with data has changed dramatically, and has pushed the role of technology as the infrastructure to support it but also in terms of processing capabilities to make sense of it. Each and every data point in isolation does not tell you much, but analysis of big data allows you to identify patterns that can be taken into consideration or not."
ESG can be prescribed from a regulatory perspective and "that can help to promote this segment" but ultimately "people will resist it when is not adding value", concludes Feiner.
"The shift we have seen across institutional investors' portfolios suggests that despite a regulatory drive people are also taking a view and voting with their money," says Feiner.
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