AI: Smart—at scale
Asset managers go on ESG buying spree; sustainable investing faces an existential question; ESG now a third of global assets. Plus, how can qualitative and quantitative analysis work together?
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🍾 ESG tech is in demand. In the last fortnight: Vanguard buys Just Invest (ESG direct indexing) JPM buys OpenInvest (ESG for IFAs) Blackstone buys Sphera (ESG software). Plus, AMG buys Parnassus (the biggest ESG firm).
❓ Why is the valuation of sustainable stocks so similar to that of the market? ESG indices track the market and avoid large deviations, say Bridgewater Associates. In other words, they cut out the worst rather than choosing the best.
😡 That may not be a problem for some, but it is for others: namely ex-BlackRock CIO Tariq Fancy. He argues asset managers are more focused on marketing sustainable funds than creating investments that have a real impact.
🗜️ Investors face growing pressure to stop supporting regimes that abuse citizens. The dilemma between sovereign debt profits and human rights exposes a tension at the heart of ESG: is it a way to improve returns, or an end in itself?
📣 Are activist investors the antidote to inefficient ESG consultants? The FTsuggests Exxon is the canary in the coal mine: a company that, at the behest of activist shareholders, has been forced to cut back on oil & gas expansion.
👎 Asset managers are issuing “poorly drafted” pitches for funds meant to combat climate change, with claims that “do not bear scrutiny,” says the UK's FCA, as it orders companies to improve disclosures.
📈 The sustainable investment market has hit $35.3trn, or 36% of global assets. That represents a growth of 15% in two years across the US, Canada, Japan, Australasia and Europe, with Canada experiencing the largest increase.
👊 As listed companies come under pressure to act on ESG issues, a reaction is fuelling buyouts by private equity firms. Is—as Larry Fink has warned—private equity facilitating a rebellion against public companies?
Util in the news
🚀 Our partnership with BNP's Manaos has garnered press. Read more in ESG Today, Institutional Asset Manager, Global Custodian, Markets Media, Finextra, Crowdfund Insider and Asset Servicing Times. Or, just check the release.
AI: Smart—at scale
Util is a machine-learning company. As a herd of engineers, we're often faced with the same question: How long until the robots take over?
The reality is, artificial intelligence (or AI) is not as smart as people think. In terms of qualitative analysis, it doesn't compare to the fund managers who get to know companies, their supply chains and their management.
But AI has a critical role. Unlike humans, technology can do two things exceptionally well: measure companies at scale, and consistently.
In a world shaped by globalisation, that counts for a lot. We talk about ESG as if it's three distinct categories. In reality, it accounts for every risk we couldn't have previously measured: every extra-financial metric that informs the value of a company. Whereas, before, we could only measure one slice of a company's value—its bottom line—we can now understand the other slices that inform the whole pie. That's only possible with technology.
If the accounting hurdle was globalisation and its myriad accompanying risks, the solution is AI. We can finally make sense of the mess of environmental, social and financial factors that influence a company's risk and return factors.
The trend towards assessing companies as a sum of their parts has dovetailed with another trend: that towards passive—over active—funds. Gone are the days where investors pay a premium for an active fund manager who knows his or her small universe of companies inside out. Today, retail investors are flocking to index and smart beta funds, which are exposed to a much larger basket of companies. You can’t get away with not having a clear view of the suppliers and buyers supporting your target company. Coverage is important, not just for the ability to select a diversified number of high-quality companies, but also to mitigate risk.
To date, ESG has been perceived as an active management flex: one enabled by one-to-one engagement between fund managers and companies. As retail investors pour capital into index ESG funds, that's changing. Scale and uniformity are now key. It's no longer enough to have a personal relationship with management or access to the rating reports for the largest 250 companies in your country. You need to understand the entire spectrum of companies in your investable universe.
It may not be as intelligent as the scaremongers assume. But AI solves the next step in the sustainable investment journey. When qualitative and quantitative analyses merge, investors will finally be able to assess the full pie.