ollowing the agreement between Deutsche Bank and Arabesque Partners to launch a new family of investment products that track the returns of the firm's Prime and Systematic indices, SRP spoke to Andreas Feiner (pictured), head of ESG research and advisory at Arabesque, about the increasing ESG focus in the investment products landscape and how the firm is capitalising on the 'ESG data revolution' to provide investment solutions in this segment.

Arabesque was first developed in 2011 by Barclays Bank, before its senior management bought out all rights and intellectual property and established Arabesque as an independent firm in 2013, says Feiner. The firm was built in cooperation with professors from the universities of Stanford, Cambridge, Oxford, Maastricht and the German Fraunhofer Society, in support of the United Nations Global Compact.

"It is a story of partnership between leaders in finance, mathematics and sustainability working together to develop the next generation of asset management," says Feiner. "We are best described as the world's first specialist ESG Quant asset management firm. Our model is based on the integration of environmental, social and governance (ESG) data with quantitative investment strategies."

Deutsche Bank rolled out a new family of investment products in June this year through a partnership with Arabesque. The products - which are now live, track the returns of the Arabesque Prime and Systematic indices which are designed and operated by Arabesque.

According to Feiner, these indices mimic in a systematic transparent manner the trading strategies employed by Arabesque for their ESG-funds, with Solactive acting as the calculating agent. Deutsche Bank is aiming to raise €1bn through the products in the next two years.

"We are continuing to build a comprehensive offering which will include long/short portfolio strategies with an ESG component," says Feiner. "We are also developing an index targeted at providers of index-linked and structured products."

The firm's investment technology processes over 100 billion data points to select an investment universe of global stocks that deliver superior returns, and screens thousands of stocks to identify around 1,000 companies which comply with its corporate responsibility guidelines and demonstrate strong environmental, social and governance performance. In the selection process, Arabesque also applies a range of other non-ESG filters to these companies to identify which companies score highly on other criteria such as financial stability, earnings momentum and market sentiment.

According to Feiner, the firm has invested heavily in building its data analysis capabilities which has made it visible in the market. "Over the past few years we have witnessed an ESG 'data revolution', driving what I believe is one of the most significant trends in the financial markets for decades," says Feiner. "This nonfinancial information can tell us more about the DNA of a company than ever before, and investors increasingly understand this and are seeking products that effectively integrate ESG data whilst delivering performance."

Arabesque's strong ESG-framework is one of the key reasons, alongside the firm's quantitative focus, and a flexible offering behind Deutsche Bank's decision to partner with Arabesque earlier this year, according to Feiner.

The 'ESG data revolution', points Feiner, is being driven by a number of factors, not least, regulation. New guidelines published by the European Insurance and Occupational Pensions Authority (Eiopa) recently included requirements for corporate pension funds to consider climate risk and ESG in its fiduciary mandates within the next two years. The new rules don't include guidelines as of how to do this and who to do it with but it clearly establishes a requirement to consider ESG when building investment portfolios, according to Feiner.

In addition, says Feiner, the European Parliament passed a law in 2014 with new requirements for large companies based in the EU to disclose information about ESG in their annual reports by 2017. The disclosure requirements will apply to all publicly traded companies with at least 500 employees, as well as certain banks, insurance companies and other 'public-interest entities' designated by national governments, according to Feiner.

Eiopa's rules also require that companies in Europe with over 50 employees or €50m in revenues will have to provide and disclose ESG data relating to their activities while in Japan, the US$1.2tr Government Pension Investment Fund (GPIF) which is the largest corporate pension fund in the world, signed up to the United Nations-supported Principles for Responsible Investment (PRI) with a mandate to include in its portfolio products linked to an ESG index comprising Japanese companies. The GPIF also announced in 2014 a strategic reallocation shift to local equity investments including Japanese equities and related structured products. In the US, according to Feiner, the department of Labour (DoL) has clarified that ESG when it's used for stock selection is now part of the fiduciary duty.

"All of these developments suggest that there are a number of building blocks  in the investment products market that are moving towards an ESG set up, and that is very important for us," says Feiner.

Another driver of ESG into the mainstream is the increased awareness amongst investors of the value of ESG information, says Feiner, adding that a decade ago only a handful of corporates reporting data on ESG, whereas today there are more than 6,000 companies reporting this data.

"At Arabesque, we use patterns to select 1,000 global stocks into a combination that delivers a superior risk-return profile using fundamental, quantitative, forensic, financial and non-financial ESG data," Feiner says. "The data used in the ESG segment has improved in quantity and quality over the last few years but there's still room for improvement."

 

Related stories:
Smartbeta meets ESG
BNP Paribas expands offering on ESG build up push
Commerz moves to develop ESG low vol range
DB partners with Arabesque to rollout new ESG/smart beta investment products range