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Asset Managers and ESG: Ignore, Engage, Drop or Deliberate

Synopsis: The news that Harvard University, with USD 42bn AUM will divest from the Oil & Gas sector, has attracted a lot of media attention. This year has seen many significant ESG related responses from the global institutional asset managers in several high-profile cases. Events like the small hedge fund, Engine No. 1’s unexpected victory over the global Oil & Gas behemoth, ExxonMobil’s senior management have shaken the corporates worldwide for sure and they have also provided a template for the activist shareholders and assertive asset managers. But there are significant differences in the approach asset managers would adopt on ESG issues. An example could be the difference in approach of Norges Bank as compared to how GIC of Singapore would proceed with voting decisions. While Asset managers are responding differently as ESG continues to gain popularity and continues to see fund inflows, EMAlpha on the basis of its AI-ML based ESG analytics models believes that there is a need to look beyond a simple ‘exclusion’ based approach. The investors who care for the environment and other major ESG issues could be far more useful in bringing change within the company as shareholders. There are two reasons for it, a) the importance of ‘nudge’ cannot be overemphasized and the companies could reform when shareholders espouse the ESG cause, b) for the companies not willing to change, as the ExxonMobil case proved, even the most insignificant shareholder in terms of percentage ownership could build momentum against the management if required. So, engagement followed by an informed decision could work the best for asset managers. Clearly, the right ESG message and most appropriate approach on the sustainability issues for asset managers is: Don’t ignore….first engage and deliberate and then if needed, drop as the last resort.

Harvard University will stop investing in Fossil Fuels

In terms of Assets Under Management (AUM), 42 billion USD is hardly anything for an asset manager. The largest of them, Blackrock is almost 200 times bigger and there are more than 30 asset managers with AUMs in excess of a trillion dollars. But Harvard University is no ordinary asset manager that will be measured by AUM alone and the influence it will have because of the standing the university has, will be measured rather differently.

Hence, the media coverage on the news last week that Harvard University endowment will stop making investments in fossil fuels, is fairly justified. In a message to the Harvard community, the President of Harvard University, Lawrence Bacow said that Harvard endowment managers don’t intend to make any more direct investments in companies that explore or develop fossil fuels. In addition, the endowment’s legacy investments in private equity funds with fossil fuel holdings will end as these partnerships are liquidated.

As many media reports highlight that this is not an unplanned move or a knee-jerk reaction as Bacow mentioned that the university has not had direct investments in fossil fuels since June and that its indirect investments make up less than 2% of the total endowment, out of total USD 41.9 billion. “Given the need to decarbonize the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission, we do not believe such investments are prudent,” Bacow added.

Nevertheless, it is a significant change as compared to the stand Harvard had taken earlier. As one of the reports highlights correctly that Bacow and many of his predecessors have publicly opposed divestment in fossil fuel companies. Instead of divestment, the focus was on combating climate change through teaching, research, and campus sustainability efforts. This is despite strong protests from several sections including activists, students, and alumni. It is difficult to ascertain what was the trigger point, but the global ‘ESG’ wave must certainly have been an important factor.

The reactions are mixed on what the decision signifies and what it would do for the broader industry. The opinions are still divided as the supporters of this divestment or ‘no more investments’ move think that this vindicates the stand of climate change activists while others are not as pleased, indicating that this is nothing but symbolic and hardly moves the needle. Some others also say that exclusion or divestment is hardly the solution the world can afford.

The argument is that as long as the oil companies continue to operate and there is no one to direct them on how to make a transition as all the shareholders who care for climate issues have divested, the solution is far worse than the problem itself. Nevertheless, it is very likely that Harvard’s announcement could have implications for the university endowment managers across the USA and also globally. This is also a huge encouragement for activist investors who are concerned about different, unrelated issues.

The role of asset managers and media

Whether it be investors or regulators, there is an increasing demand for more transparency and more disclosures from companies. While the Covid-19 did certainly accelerate the process, the building blocks were being put into place well before that, and that includes increased scrutiny. For example, if the ExxonMobil vs. Engine No. 1 case and many other developments where investors have taken a proactive stand sheds any light, the ESG age has certainly begun and more questions are being asked. This is unlikely to stop here and we can expect that the scrutiny will intensify.

And hopping on the ride, media has also become very interested in ESG issues. But as they say, not all the relevant and important developments get equal media attention. Therefore, media attention may not be the right tool of measure. But nonetheless, the world that we happen to reside in today finally seems to be acknowledging the need for sustainable business practices, failing which adequate repercussions are gradually being meted out. The entire ESG ecosystem is evolving very fast and undergoing a transformation phase.

The Oil & Gas Industry is under target

Some of the events at the world’s largest Oil & Gas companies such as ExxonMobil, Chevron, and Royal Dutch Shell are clear evidence of ESG’s (Environmental, Social and Governance) significant impact on the industry. Over the next few years, a) the Oil & Gas companies will increasingly be under pressure on ESG issues, b) conflicts between the board and senior management will rise, and, c) more shareholders will play the role of an opportunistic activist which will be bad for the ESG movement.

It is also very likely that the attractiveness of Oil & Gas companies for the investors will continue to decline as ESG filters play a more important role in investment decisions, which won’t favor the Oil & Gas companies. There is no other choice for the companies but to bring reforms and ultimately pay more attention to environmental issues, in particular, and ESG, in general. These reforms could be resisted by the Old guard, thus slowing down the progress they would make.

The investors are rightly questioning their asset managers about the companies they own in their portfolios. The shareholders and investment managers are questioning the companies on their sustainability track record and blocking proposals for the non-performing management. Social media is quick to give a major push back on any controversial issues and the regulators in general, are questioning the companies on issues like greenwashing.

We are not sympathetic towards Oil & Gas companies and we do believe that many of these companies have done their best to maintain the status quo. The ‘business as usual’ suits them the best and they have tried hard to continue with their utter disregard for critical ESG issues. But we also think that ESG and Big Oil is a complex relationship. There are several issues where simplistic explanations are offered, which assume that by solving the problem of pollution caused by the Oil & Gas companies, the challenge of emission control can be handled. These issues include;

  • Without any proper transition plan, can the world survive without Oil, and are the currently proposed transition plans feasible?
  • In the case of Big Oil, are the stakeholders focusing too much on the Environmental part and ignoring Social and Governance issues?
  • Are all the Oil & Gas companies in the wrong and are they not doing enough to cut down emissions, thus making it unfeasible to arrive at real solutions?
  • Is the problem of Oil & Gas companies related to their communication and did they get the messaging wrong on ESG issues?
  • Why should only Oil & Gas companies be the target when some other industries don’t come under the limelight? For example, are the lenders (Banks and Financial Institutions) who fund these projects, not responsible?

The Regulators are getting more proactive

The asset managers like Blackrock and many others were already asserting themselves that the companies should reform and they need to do more to become proactive on their sustainability efforts. But as the case of DWS Group and the inquiry ordered by the US and German authorities indicate, the regulators have proven that the asset managers themselves will also be held accountable and the onus will be on them to prove that what they are saying on the ESG strength of their portfolio is backed by solid evidence.

Increasingly, the regulators are also focusing on other areas like data breach and governance. They are questioning the sustainability credentials of their investment portfolios. Nonetheless, the good news is that the regulators are now not unsure anymore about the relevance of ESG. They are not debating if sustainability filters are good or bad, are they useful or are they not, and if ESG is a fad that will subside with time. The regulators have perhaps realized that it will be futile to fight the global ‘ESG’ trend.

This is a major positive development for ESG advocates as this development indicates that the ‘whether’ or ‘if’ part has been resolved. There are also other important developments. For example, the regulator’s focus on often ignored issues like data breaches and privacy standards. According to a Reuters article, the U.S. Securities and Exchange Commission (SEC) is carrying out an investigation into the SolarWinds Russian hacking operation. The SEC is asking companies for records into “any other” data breach or ransomware attack dating back to October 2019.

The issue under the scanner, in this case, is related to bugged network management software update from the SolarWinds Corp, a software product company that has clients across entire corporate America. The Reuters report says that it is very likely that the SEC requests may reveal numerous unreported cyber incidents, giving SEC more details into previously unknown incidents that the companies never disclosed.

SEC’s focus on unreported cybersecurity incidents for US companies offers good insight into how the regulators are now thinking about the disclosure standards and ESG issues. While the cyberattacks have grown in frequency and impact prompting deep concern among policymakers, the U.S. officials have faulted companies for failing to disclose such events, arguing that it conceals the extent of the problem to a large degree.

The message is clear, the regulators believe that ESG is here to stay and the regulators have accepted it. The next task for the regulators is to figure out the ‘how’ of ESG investing and to ensure that there is a level playing field. So, in many ways, this is a big win for the global ‘sustainable finance’ industry and indeed, great news for the planet and humanity. It is a major progressive step from the regulators and could prove to be the harbinger of a new era in ESG investing.

The Companies are responding, but the progress is uneven

There are cases like Ørsted. Formerly known as DONG Energy, Ørsted is a Danish multinational power company and as of 2020, the company is one of the world’s largest developers of offshore wind power. Ørsted also offers its products and services in solar energy and storage, and renewable hydrogen.

However, the thing that is captivating about the company, is its transformation from being one of the most carbon-intensive energy companies in Europe to being ranked as the world’s most sustainable energy company in the Corporate Knights Global 100 Index – three years in a row. And that too in a matter of a little more than a decade.

Ørsted has primarily focused on two major drivers for combating climate change in its transformation journey, a) Phasing out coal – The company’s business was originally based on fossil fuels, and it was one of the most coal-intensive energy companies in Europe. But the company shifted from the fossil fuel business and now focuses entirely on renewables. According to the company, they will completely phase out the use of coal in 2023, and, b) Offshore wind energy – Ørsted has a global leadership position in offshore wind, and today, offshore wind is competitive on installation and running costs in comparison to coal- and gas-fired power plants. No wonder the offshore wind industry is a rapidly growing industry with a significant contribution to delivering green energy.

Ørsted is on track to be carbon-neutral in energy generation and operations by 2025. The company also talks about the fact that having eliminated the carbon emissions from energy production, it has progressed further on decarbonization and is committed to halving the carbon emissions from its wholesale buying and selling of natural gas and from the supply chain by 2032. Ørsted targets to achieve a net-zero carbon footprint by 2040, ten years ahead of the global target for net-zero emissions as required by climate science to limit global warming to 1.5°C.

But there are also companies like Samsung Electronics. Around mid-January this year, the heir to the company, Lee Jae Yong was sentenced to more than two years of imprisonment by the Seoul High Court on charges of corruption and bribery. To add insult to injury, Samsung Electronics got downgraded on ESG ratings twice by Korea Corporate Governance Service. Inability to move swiftly to capture the global chip demand, failed mergers and acquisitions along with failure to capitalizing on US sanctions on China’s Huawei, has left Samsung standing on a fault line.

While many South Korean firms, including Samsung, are making good progress on Environmental and Social Issues, the record is not that good on Governance. This is strange because many of its global competitors do exceedingly well in environmental and social evaluation, thus helping their overall ESG scores. This rightfully reflects in the valuation. While Samsung’s products are well in demand, the company has to change with time and address its issues head-on, especially the ESG issues which are increasingly getting factored in the stock price.

The asset managers and their different approaches to ESG

As we have seen in the case of Harvard University, the exclusion from an investment portfolio due to ESG investing filters has become a more regular occurrence over the last eighteen months and the largest funds of the world are taking a lead in this. Some of the funds will talk about it a lot more than others while some will do it rather quietly. But this is a phenomenon that is rather difficult to miss.

Often, there is overwhelming support for ESG proposals in shareholders’ meetings and the asset managers are increasingly asserting themselves on sustainability and ESG issues. In benign cases, many investment managers nudge the companies to behave more responsibly on environmental, social, and governance issues, and in more unpleasant situations, they impose their will by pushing for the reconstitution of the board.

So, when the world’s largest sovereign wealth fund, Norges Bank Investment Management (Norges Bank or NBIM) decided to exclude four companies from the Government Pension Fund Global at the beginning of this month, the reaction was subdued. The markets expect these things to happen as the global asset managers continue to take these decisions more regularly and more proactively.

Norges Bank has decided to exclude Elco Ltd, Ashtrom Group Ltd, and Electra Ltd due to unacceptable risk based on the companies’ activities associated with Israeli settlements on the West Bank. Also, Oil & Natural Gas Corp Ltd from India was excluded because of the company’s ties to groups that seriously violate human rights in South Sudan.

What is more interesting is the lag between the recommendation to exclude from the Council on Ethics at Norges Banks and the final decision. For the first three companies, the decision is based on recommendations of 15th March 2021. In the case of Oil & Natural Gas Corp, the decision is based on a recommendation of 8th January 2021. The time gap between recommendation and execution is for a reason.

Norges Bank explains “The Executive Board is satisfied that the exclusion criteria have been fulfilled. Before deciding to exclude a company, Norges Bank shall consider whether the use of other measures, including the exercise of ownership rights, may be better suited. The Executive Board concludes that it is not appropriate to use other measures in these cases.”

For the funds and their asset managers, between a hasty outright exclusion at one end and an endless process of engagement at the other, what Norges Bank Investment Management has done seems like a more sensible approach. Think, analyze and then decide. In some cases, engagement may not yield results. But it is important to look at the companies individually and not just on the basis of which sector is good and which sector is bad. Give the companies a chance and if nothing else works, DROP the companies and move on.

But, is dropping the non-ESG compliant companies from their investment portfolios in the best interest, collectively speaking? No doubt, the easiest thing for the asset managers to do is to rate the companies on their ESG track record and just drop the poor performers and then buy more of the good ones. But that is hardly the solution, the world needs today. Businesses don’t always reform themselves on their own and asset management firms need to engage with them.

That’s the approach Government of Singapore Investment Corporation (GIC) is adopting. In a recent article “Singapore’s GIC keen on companies with potential to improve ESG: State fund says sustainability is ‘top management priority'” in Nikkei Asia, one of the most influential sovereign wealth funds highlights how they are looking for businesses that have the potential to transition to a more sustainable model.

Everyone deserves a chance and that is the sentiment echoed when Tzu Mi Liew, GIC Chief Investment Officer for Fixed Income says “If they are willing to work with us, even though the starting point is very low, we very much like to work with that because we see a very positive case coming out from them”. The point GIC is making here is that sustainable investing is not going to work with ‘one size fits all’ approach because every company has “different starting points” in terms of building a business that complies with ESG standards.

The decision to remain invested or divest a stock from the portfolio can only be taken after considering all the possible factors and that process will include engaging with the company, That’s the balanced approach that is needed to ensure that collectively we make progress. Penalty alone is not enough. GIC acknowledges that some investors may simply divest or pass on investment opportunities in a company with low ESG standards. But this is not their stance. Liew, who also chairs its sustainability committee says that constructive engagement was critical.

Perhaps, it can’t be put better than this……”We believe it is more constructive to actively engage and support companies in their transition towards sustainability rather than adapting a blunt top-down divestment approach,” Liew said. “It is not whether the ESG standard is high or low that determines whether we want to invest,” she said. “It is about understanding whether there is any opportunity for transition.”

But not everyone agrees. Often, Blackrock has ‘top of the mind recall’ among global asset managers when it comes to espousing the ESG cause and pushing the companies to become more proactive and do more on ESG parameters. Not just because of its size but also as a result of CEO, Larry Fink’s aggressive posture on Sustainability issues. However, there are many other asset managers taking a serious view on ESG matters. Putting the foot down on companies not complying with sustainability practices and disclosures, has become more common.

For example, Legal & General Investment Management (LGIM), a couple of months ago, ousted four companies from its funds: AIG, Industrial and Commercial Bank of China, PPL Corp and China Mengniu Dairy. Coming on the heels of the ExxonMobil episode, this was yet another major victory for the ESG space. Out of all the major global asset managers, LGIM has been the most vigilant when it comes to enforcing sustainability practices. While the covid pandemic acted as the catalyst for majority asset managers to consider sustainability issues, LGIM had been laying the foundation much before that.

How EMAlpha can help

While Asset managers are responding differently as ESG continues to gain popularity and continues to see fund inflows, there is a need to look beyond a simple ‘exclusion’ based approach. The investors who care for the environment and other major ESG issues could be far more useful internally as shareholders. That is for two reasons, a) the importance of ‘nudge’ cannot be overemphasized and the companies could reform when shareholders espouse the ESG cause, b) for the companies not willing to change, as the ExxonMobil case proved, even the most insignificant shareholder in terms of percentage ownership could build momentum against the management if required. So, engagement followed by an informed decision could work the best for asset managers.

There are also situations when the ESG issues need to be seen in more microscopic detail. For example, EMAlpha has long stressed on the need to have sectorial related E, S, and G disclosures and separate evaluation. As highlighted above, sustainability challenges would vary from industry to industry and the asset managers will see and respond to them differently. Thus it becomes imperative to gauge companies on sustainability metrics that are exclusive to the concerned industry. It is here that EMAlpha with its proprietary algorithm and AI-ML techniques becomes a key tool for the investors.

The recent developments in which ESG and asset managers had an interplay had very interesting results and they have important lessons for the companies. These are also situations in which EMAlpha’s AI-ML analysis can help investors. For example, Can the local news flow collection pick up issues, earlier than the English media? Considering how important the Sustainability and ESG issues have become, the local language along with English news analysis can be tracked for the companies experiencing ESG issues.

Considering the sensitivities involved, especially when institutional investors have invested in the stock, the ESG issues could escalate quickly, thus impacting the stock price performance. In this, a regular analysis of social media (such as Reddit feed) can be used as input before taking an investment decision. Hence, EMAlpha’s analysis of unstructured data becomes a key tool for investors. The unstructured data analysis in other geographies can also be used to assess the potential impact on some of the larger companies.

The takeaway from the decisions of many other asset managers over the last few years emphasizes the importance of ESG issues. It is also pertinent that predicting the behavior of large institutional investors on the basis of trading information can help forecast the stock price impact. The changes in perception on ESG track record of a company or an asset manager and reactions from institutional investors have become an important driver of stock prices and especially in cases where the volatility is high, it matters even more.

The EMAlpha sentiment and ESG scores prove that there is a strong link between stock price performance and these scores. This is helpful in investment decision-making. This is one of the key features of EMAlpha product as it combines technology with domain expertise. The news flow analysis provided by EMAlpha is useful in picking up the signals when the views change for the institutional investors about a stock.

The news flow analysis and their impact assessment are very difficult to track and hence, it is a cumbersome exercise for asset managers if done without optimal help from machines. EMAlpha solves this problem for portfolio managers, at both portfolio and the company level. EMAlpha’s sophisticated AI-ML tools and proprietary analytical methods are based on deep domain expertise and unmatched technological prowess, helping the investors with the most effective and efficient input.

References

  1. Harvard University Will Stop Investing In Fossil Fuels After Years Of Public Pressure https://www.npr.org/2021/09/10/1035901596/harvard-university-end-investment-fossil-fuel-industry-climate-change-activism (Accessed on 13th September 2021)
  2. No more fossil fuel for Harvard, the world’s largest academic endowment is officially washing its hands off fossil fuel investments https://the-ken.com/bfo/369/ (Accessed on 13th September 2021)
  3. Harvard University pledges to divest from fossil fuels https://inhabitat.com/harvard-university-pledges-to-divest-from-fossil-fuels/ (Accessed on 13th September 2021)
  4. Harvard University to end investment in fossil fuels https://www.reuters.com/world/us/harvard-university-will-allow-fossil-fuel-investments-expire-2021-09-10/ (Accessed on 13th September 2021)
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  6. ‘A Large Domino to Fall’ — Harvard to End Fossil Fuels Investments https://www.ecowatch.com/harvard-fossil-fuels-divest-2655009473.html (Accessed on 13th September 2021)
  7. Exxon CEO Is Dealt Stinging Setback at Hands of New Activist https://www.bloomberg.com/news/articles/2021-05-26/tiny-exxon-investor-notches-climate-win-with-two-board-seats (Accessed on 13th September 2021)
  8. A Watershed Day For Exxon, Activists And ESG https://chiefexecutive.net/a-watershed-day-for-exxon-activists-and-esg/ (Accessed on 13th September 2021)
  9. Engine No. 1 extends gains with a third seat on Exxon board https://www.reuters.com/business/energy/engine-no-1-win-third-seat-exxon-board-based-preliminary-results-2021-06-02/ (Accessed on 13th September 2021)
  10. Exxon director calls activist campaign, ESG pressures a ‘tidal wave’ https://www.reuters.com/business/sustainable-business/exxon-director-calls-activist-campaign-esg-pressures-tidal-wave-speech-2021-06-02/ (Accessed on 13th September 2021
  11. Straggling on climate change no longer an option—Big Oil faces its reckoning https://fortune.com/2021/05/27/big-oil-climate-change-reckoning/ (Accessed on 13th September 2021)
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  13. Chevron open to sale of Canadian oil sands stake to meet green goals https://www.worldoil.com/news/2021/6/3/chevron-open-to-sale-of-canadian-oil-sands-stake-to-meet-green-goals (Accessed on 13th September 2021)
  14. Shell: Netherlands court orders oil giant to cut emissions https://www.bbc.com/news/world-europe-57257982 (Accessed on 5th June 2021)
  15. Myanmar: Fossil giants Total and Chevron stop junta payments https://www.telegraphindia.com/world/myanmar-fossil-giants-total-and-chevron-stop-junta-payments/cid/1816959 (Accessed on 13th September 2021)
  16. Conoco shareholders back proposal to set Scope 3 targets https://www.reuters.com/business/environment/conocophillips-shareholders-back-proposal-set-scope-3-targets-2021-05-11/ (Accessed on 13th September 2021)
  17. Big Oil Faces Backlash For ‘Greenwashing’ https://in.news.yahoo.com/big-oil-faces-backlash-greenwashing-190000762.html (Accessed on 13th September 2021) https://www.nytimes.com/2021/03/25/business/media/climate-ad-agencies-fossil-fuels.html (Accessed on 13th September 2021)
  18. Saudi Oil Giant Understates Carbon Footprint by Up to 50% https://www.bloombergquint.com/business/how-much-does-aramco-pollute-missing-emissions-might-double-carbon-footprint (Accessed on 13th September 2021)
  19. DWS shares fall after US opens probe on sustainability claims https://www.bloomberg.com/news/articles/2021-08-26/dws-shares-fall-after-u-s-opens-probe-on-sustainability-claims (Accessed on 13th September 2021)
  20. US authorities investigating Deutsche Bank’s DWS Group over sustainable investing claims: WSJ https://www.cnbc.com/2021/08/26/us-authorities-investigating-dws-groups-sustainable-investing-claims-wsj.html (Accessed on 13th September 2021)
  21. DWS shares slide after greenwashing claims prompt BaFin investigation, German asset manager accused of misleading investors about its sustainable investing efforts https://www.ft.com/content/0eb64160-9e41-44b6-8550-742a6a4b1022 (Accessed on 13th September 2021)
  22. The whistle-blower who calls ESG a deadly distraction: How an ex-BlackRock executive lost faith in sustainable finance https://amp-ft-com.cdn.ampproject.org/c/s/amp.ft.com/content/4fdc6cdf-7bd6-41bc-b376-2137521e3017 (Accessed on 13th September 2021)
  23. Wide-ranging SolarWinds probe sparks fear in Corporate America https://www.reuters.com/technology/exclusive-wide-ranging-solarwinds-probe-sparks-fear-corporate-america-2021-09-10/ (Accessed on 13th September 2021)
  24. Ørsted: About our name, From magnetism to offshore wind turbines https://Ørsted.com/en/about-us/about-Ørsted/about-our-name (Accessed on 14th September 2021)
  25. Ørsted: About us, Our vision – and who we are https://Ørsted.com/en/about-us/about-Ørsted/our-vision-and-values (Accessed on 14th September 2021)
  26. Lee Jae Yong: Samsung heir gets prison term for bribery scandal https://www.bbc.com/news/business-55674712 (Accessed on 14th September 2021)
  27. Samsung heir Jae Y Lee sentenced to 2 1/2 years in prison for bribery and embezzlement https://edition.cnn.com/2021/01/18/business/samsung-jay-y-lee-prison-sentence-intl-hnk/index.html (Accessed on 14th September 2021)
  28. Samsung Elec sits idly on $ 182 billion cash hoard as invest put on hold over leadership void https://pulsenews.co.kr/view.php?sc=30800021&year=2021&no=701839 (Accessed on 14th September 2021)
  29. Samsung Electronics expects 53% increase in operating profit https://www.wsj.com/articles/samsung-electronics-expects-53-increase-in-operating-profit-11625617363 (Accessed on 14th September 2021)
  30. Samsung Electronics shares hit year’s second-lowest mark http://www.koreaherald.com/view.php?ud=20210720000949 (Accessed on 14th September 2021)
  31. Norges Bank and the exclusion decision https://www.nbim.no/en/the-fund/news-list/2021/decisions-on-exclusion/ (Accessed on 14th September 2021), https://www.livemint.com/market/stock-market-news/norway-wealth-fund-drops-ongc-from-portfolio-over-south-sudan-business-11630659948172.html (Accessed on 14th September 2021), https://www.thehindu.com/business/Industry/norway-fund-exits-ongc-due-to-south-sudan/article36280829.ece (Accessed on 14th September 2021), https://www.reuters.com/world/middle-east/norway-wealth-fund-excludes-indias-ongc-3-israeli-firms-portfolio-2021-09-03/  (Accessed on 14th September 2021)
  32. Singapore’s GIC keen on companies with potential to improve ESG https://asia.nikkei.com/Editor-s-Picks/Interview/Singapore-s-GIC-keen-on-companies-with-potential-to-improve-ESG (Accessed on 14th September 2021)
  33. LGIM steps up sustainability and governance efforts https://www.legalandgeneralgroup.com/media-centre/press-releases/lgim-steps-up-sustainability-and-governance-efforts/ (Accessed on 14th September 2021)
  34. LGIM divests AIG, other holdings for insufficient climate policies https://www.pionline.com/esg/lgim-divests-aig-other-holdings-insufficient-climate-policies (Accessed on 14th September 2021)
  35. LGIM renews pressure on companies to provide climate accountability and achieve net-zero emissions https://www.lgima.com/media/2021/climate-impact-pledge/ (Accessed 14th September 2021)

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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