Investors don’t want to be patronised with moral arguments but are to be convinced of sustainable investing by improved returns. Algorithms such as those used at Arabesque know, how to use ESG-factors profitable.
Sustainable investing is a trend that no asset manager can ignore. More and more big asset management companies integrate ESG-factors into their analyses or launch new funds that invest according to suitability factors. But personal talks and the elimination of industries are no longer the best practice of the industry. Quantitative approaches lead to one result: “No one wants to be patronised with a moral argument,” says Andreas Feiner, head of ESG research at Arabesque, to the International New York Times. “You tell investors that these companies are going to perform better.”
Using algorithms, Arabesque Asset Management manages about $50 million in each of their two funds. As the first asset manager that exclusively concentrates on ESG investing using quantitative analysis, Arabesque has developed a system that includes those sustainability criteria in selecting stocks that have a positive effects on performance. “Previously, I have relied on the recommendations of analysts,” says Anja Mikus, CIO of Arabesque, “today, an algorithm takes care of that.”
This algorithm has, for example, eliminated VW even before the diesel scandal. The firm had difficulties with their Governance due to the structure of the supervisory board, high costs for guarantee cases and too large interest rate effects on the overall result, says Mikus on Citywire. Reasons of the economic sustainability lead to the exclusion of Toshiba that has too high debt and too low capital.
The approach has success. From 77,000 shares, the Arabesque Prime Fund selects 300 and the Arabesque Systematic Fund 100. Doing so, the algorithm takes into account 1,600 indicators. “Since we went live in August 2014, we outperformed the market. It is even better than we anticipated, because the quality of ESG data is improving by the day,” says Feiner in the Modern Investors Magazine.