- COP26 was a mix of hope and frustration
- The creation of the International Sustainability Standards Board was welcome and a potential game changer
- The better our data is; the more we can agitate for change
What should investors make of COP26? For me it was a mix of hope and frustration. It is true to say that the agreement did not go far enough to limit the temperature rise to anywhere near 1.5 degrees.
However, some concrete milestones were achieved such as the pledges to ‘phase down’ coal, cut-down methane emissions and reduce deforestation, and the advancement of a rule book for a global carbon market.
During the COP 26 weeks, an adjacent announcement was also welcome: the creation of the International Sustainability Standards Board (ISSB).
It may not seem the most exciting measure but it could be a real game-changer over time as it would create a formal transparent accounting link between ESG and financial reporting for companies.
The Board, which will be a sister body to the International Accounting Standards Board, is being established to come up with reliable and comparable reporting by companies on climate and other ESG issues.
This is an area of great importance to our industry as we seek to influence companies – the better the information we have, the more we can collectively agitate for change.
ESG data – sadly lacking
Unlike economic or financial data, which is standardised and provided regularly, ESG data is slow moving and lacks standardisation: investors are largely reliant on information published by companies themselves with few common norms.
Using external ratings is not a solution either. While ESG ratings have proliferated, there is a relatively high level of dispersion with various methodologies used to judge ESG, with different measurements and weights.
There is no correlation between ratings because there is no common approach to how E, S and G are interpreted, scored and weighted. This makes ESG investing particularly difficult to navigate as, depending on which ratings company is used, the result can be quite different. Our approach is therefore to treat ESG ratings from external sources more like analyst opinions.
Impact data is even worse – it is unstructured and often more qualitative and judgmental than data for ESG. For example, it is currently difficult to quantify how a company compares against the UN’s 17 Sustainable Development Goals. Much more information is required for fund managers to make proper assessments.
Taking control of the data
In that context, we have taken the issue of ESG scoring into our own hands. Our proprietary ESG computing methodology provides a comprehensive measure of companies’ progress using indicators from external providers and distinguishing between the materiality of different indicators and issues for companies at the subindustry level. We then apply our internal weighting and finally, accommodate the impact of fast-evolving controversies, as well as their severity, by penalising the overall ESG score. We have a similar methodology for country-level ESG scores. This creates a coherent framework for corporates and countries, which is then reflected in the equity and the bonds we buy.
With regard to private assets, the situation is different again as external data is scarce. Our private equity team accesses data directly through discussion with portfolio companies, enabling them to evaluate ESG scores and SDG performance indicators for different companies based on our research.
The emergence of big data
More alternative and high frequency (big) data is now emerging to assess ESG risk with less of a time-lag. This is an advantage for active managers that can use technology to integrate this alternative source of information in their assessments. The challenge is to transform the unstructured information into valuable investment insights – technology platforms will play a big role in this.
We use natural language processing (NLP) to gain advantage. By screening posts on social media, press articles and declarations from NGOs, we can spot controversies before they are reflected in ESG ratings. Some players in the fintech space are also developing capabilities in this field and we are collaborating with them to better understand the sustainable impact of companies we invest in.
Our platform can compound and deal with different ESG databases comprising structured and unstructured data and we implement some NLP capabilities to transform data into an ESG sentiment score. It also enables us to find some investment ideas in companies that are rated positively with regard to their ESG journey.
While the ISSB will start work to standardise disclosures during 2022 and metrics will continue to improve, this will take time. In the meantime, active asset managers, particularly those who employ technology to assess and exploit information accurately, have an advantage.
Better data enables our industry to reward and allocate capital to companies adapting to the requirements of a sustainable economy, while upping the pressure on those who don’t. Capital allocation linked to technology transparency can collectively contribute to drive the change COP 26 has stimulated.
This document is provided to you on a confidential basis and must not be distributed, published, reproduced or disclosed, in whole or part, to any other person.
The information and data presented in this document may discuss general market activity or industry trends but is not intended to be relied upon as a forecast, research or investment advice. It is not a financial promotion and represents no offer, solicitation or recommendation of any kind, to invest in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment.
The investment views, economic and market opinions or analysis expressed in this document present Unigestion’s judgement as at the date of publication without regard to the date on which you may access the information. There is no guarantee that these views and opinions expressed will be correct nor do they purport to be a complete description of the securities, markets and developments referred to in it. All information provided here is subject to change without notice. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks.
Data and graphical information herein are for information only and may have been derived from third party sources. Although we believe that the information obtained from public and third party sources to be reliable, we have not independently verified it and we therefore cannot guarantee its accuracy or completeness. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion. Past performance is not a guide to future performance. All investments contain risks, including total loss for the investor.
Unigestion (UK) Ltd. is authorised and regulated by the UK Financial Conduct Authority (FCA) and is registered with the Securities and Exchange Commission (SEC). Unigestion (US) Ltd is registered with the Securities and Exchange Commission. Unigestion Asset Management (France) S.A. is authorised and regulated by the French “Autorité des Marchés Financiers” (AMF). Unigestion Asset Management (Canada) Inc., with offices in Toronto and Montreal, is registered as a portfolio manager and/or exempt market dealer in nine provinces across Canada and also as an investment fund manager in Ontario, Quebec and Newfoundland & Labrador. Its principal regulator is the Ontario Securities Commission. Unigestion Asset Management (Düsseldorf) SA is co-regulated by the “Autorité des Marchés Financiers” (AMF) and the “Bundesanstalt für Finanzdienstleistungsaufsicht” (BAFIN). Unigestion SA has an international advisor exemption in Quebec, Saskatchewan and Ontario. Unigestion SA is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). Unigestion SA’s assets are situated outside of Canada and, as such, there may be difficulty enforcing legal rights against Unigestion SA.
Additional Information for US Investors
This material is disseminated in the U.S. by Unigestion (UK) Ltd., which is registered as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”). This information is intended only for institutional clients and qualified purchasers as defined by the SEC and has therefore not been adapted to retail clients.
The performance figures are based on estimated fees and expenses as well as on the underlying strategy’s estimated performances given by fund managers, administrators,custodians and third party sources at a given date. Where performance is reflected gross offees, potential investors should be aware that the inclusion of fees, costs and charges willreduce the overall value of performance. Unless otherwise stated, the performance datasource are Unigestion, Bloomberg and Compustat.This information is provided to you solely to give you background information relating toUnigestion, certain strategies it implements and currently offers. Before making aninvestment decision with respect to the strategy discussed herein, potential investors are advised to consult with their tax, legal, ERISA and financial advisors. Note that not allstrategies may be available or suitable for investment by U.S. investors.This document may contain forward-looking statements, including observations aboutmarkets and industry and regulatory trends as of the original date of this document.Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms,and similar expressions. Forward-looking statements reflect Unigestion’s views as of such date with respect to possible future events. Actual results could differ materially from those in the forward-looking statements as a result of factors beyond a strategy’s or Unigestion’s control. Readers are cautioned not to place undue reliance on such statements. No partyhas an obligation to update any of the forward-looking statements in this documentReturn targets or objectives, if any, are used for measurement or comparison purposes andonly as a guideline for prospective investors to evaluate a particular investment program’sinvestment strategies and accompanying information. Performance may fluctuate,especially over short periods. Targeted returns should be evaluated over the time periodindicated and not over shorter periods.The past performance of Unigestion, its principals, shareholders, or employees is notindicative of future returns.Except where otherwise specifically noted, the information contained herein, includingperformance data and assets under management, relates to the entire affiliated group ofUnigestion entities over time including that of Unigestion UK. Such information is intendedto provide the reader with background regarding the services, investment strategies andpersonnel of the Unigestion entities. No guarantee is made that all or any of the individualsinvolved in generating the performance on behalf the other Unigestion entities will beinvolved in managing any client account on behalf of Unigestion U.K. More specificinformation regarding Unigestion UK is set forth herein where indicated and is available onrequest.There is no guarantee that Unigestion will be successful in achieving any investmentobjectives. An investment strategy contains risks, including the risk of complete loss.The risk management practices and methods described herein are for illustrative purposesonly and are subject to modification.
Document issued: November 2021