{"id":7040,"date":"2020-12-01T09:14:00","date_gmt":"2020-12-01T09:14:00","guid":{"rendered":"https:\/\/www.quoniam.com\/?p=7040"},"modified":"2025-03-17T13:11:22","modified_gmt":"2025-03-17T13:11:22","slug":"quantifying-sustainability","status":"publish","type":"post","link":"https:\/\/www.quoniam.com\/en\/article\/quantifying-sustainability\/","title":{"rendered":"Quantifying sustainability \u2013 making sense of ESG data"},"content":{"rendered":"\n
\n
1.) How have ESG data providers evolved during the last ten years and what are the current challenges?<\/h5>\n\n\n\n

Ten years ago, asset managers looking to apply responsible investing criteria to portfolios were faced with a choice: Should they buy the data from external providers, knowing that the availability is limited and the quality perhaps questionable? Or, should they
invest in building up the large teams necessary to conduct in-depth research themselves? Asset owners looking to implemented ESG typically searched for specialist asset managers.<\/p>\n\n\n\n

Today, data providers flood the market as awareness for ESG has grown as both asset managers and asset owners prepare their portfolios for increasing regulatory requirements. While data quality has improved, the new challenge is its quantity. We have entered a phase of \u201cESG Big Data.\u201d The new data is often inconsistent across providers and also unstructured.<\/p>\n\n\n\n

Some asset managers will maintain and expand their in-house research teams but will have to compete in quality with the rising number of data providers. These managers must also remain cost efficient and continue to believe that they can add value versus data providers. The remaining managers will choose to buy data and turn it into useful information for their investment process.<\/p>\n\n\n\n

Institutional clients no longer have a narrow selection of ESG asset managers. They face not only an oversupply of data but a barrage of asset managers claiming expertise. To reduce the complexity of the task, they will need to identify the asset managers who help them understand all the data and show them the way to best implement their regulatory requirements and stakeholder objectives.<\/p>\n<\/div><\/div>\n\n\n\n

\n\n\n
\n
\n
\n

‘We are constantly broadening our knowledge of ESG data and its interdependencies.’<\/span><\/p>\n\n <\/div>\n <\/div>\n

\n
\n \"\"\n <\/div>\n
\n

Mara Schneider
\n<\/span><\/strong>SI Manager<\/span><\/p>\n\n <\/div>\n <\/div>\n<\/div>\n<\/div><\/div>\n\n\n\n

<\/div>\n\n\n\n
\n
2.) What makes too much ESG data a challenge for asset managers and owners?<\/h5>\n\n\n\n

Imagine that a pension fund with no experience in ESG wanted to take 1 billion EUR in assets from 0% to 100% ESG invested. Where would that asset owner start? Terms like ESG roll off the tongue but we have to remember that each letter stands for a highly complex, qualitative topic that needs to be first understood, interpreted and quantified.<\/p>\n\n\n\n

At Quoniam, we have analysed different data providers including MSCI, ISS and Bloomberg and found that similar data sets have low correlations. For example, the MSCI ESG score has a 0.35 correlation with Bloomberg\u2019s ESG score. This poses a huge challenge for institutional investors because the data provider you choose will lead to different outcomes.<\/p>\n<\/div><\/div>\n\n\n\n

\n
3.) How does this look when you drill down to a single company?<\/h5>\n\n\n\n

Let\u2019s take one of the world\u2019s largest meat producers as an example. S&P Trucost\u2019s metrics for the company\u2019s CO2 footprint and water usage are both high and the MSCI rating is poor (CCC), as we would expect. If we look at the UN Sustainable Development Goals, we have conflicting insights by MSCI and ISS. While MSCI indicates a 97% positive impact on UN SDGs, ISS rates the meat producer negatively.<\/p>\n<\/div><\/div>\n\n\n\n

<\/div>\n\n\n\n
SI is a complex game \u2013 look at all the aspects<\/h5>\n\n\n\n
\"\"
Figure 1: 1) Carbon Intensity: t water intensity: m\u00b3 water usage\/million USD revenue 2) CO2\/million USD revenue; Source: MSCI, Trucost, ISS<\/figcaption><\/figure>\n\n\n\n
\n

The next example is a hydropower plant. The company\u2019s overall ESG rating is AA and both MSCI and ISS give the company good SDG scores. What doesn\u2019t look so good is the score for environment. The company\u2019s CO2 footprint is high and its water usage categorized as very high.<\/p>\n\n\n\n

You see by these two examples that ESG ratings and metrics can express opposing views for the same company. Context matters when evaluating a company\u2019s ESG performance. Each mandate\u2019s guidelines can create an individual context, for example investing with a specific focus on reducing water usage. From this angle, the hydropower plant would most likely be excluded despite its positive contribution to the SDGs.<\/p>\n<\/div><\/div>\n\n\n\n

\n\n\n
\n
\n
\n

‘<\/span>Context is decisive when evaluating ESG performance.’<\/span><\/p>\n\n <\/div>\n <\/div>\n

\n
\n \"\"\n <\/div>\n
\n

Dr. Veronika Herzberger<\/strong>
\nP<\/span>ortfolio Management<\/span><\/p>\n\n <\/div>\n <\/div>\n<\/div>\n<\/div><\/div>\n\n\n\n

<\/div>\n\n\n\n
\n

These differences force asset owners to dive into the details. Institutional investors have to know which data providers will best express their preferences and avoid reputational risk from misunderstanding. We try to make ESG easier for our clients by guiding them through the differences in data and help them to make the right choices from the outset.<\/p>\n<\/div><\/div>\n\n\n\n

\n
4.) Can all ESG data be quantified?<\/h5>\n\n\n\n

If you want to screen a global investment universe for controversies or calculate the environmental footprint of your portfolio, you need this information quantified.<\/p>\n<\/div><\/div>\n\n\n\n

\n\n\n
\n
\n
\n

‘<\/span>We combine ESG ratings, environmental metrics and SDGs into our own ESG-composite.’<\/span><\/p>\n\n <\/div>\n <\/div>\n

\n
\n \"\"\n <\/div>\n
\n

Johannes Lins
\n<\/span><\/strong>Portfolio Management<\/span><\/p>\n\n <\/div>\n <\/div>\n<\/div>\n<\/div><\/div>\n\n\n\n

<\/div>\n\n\n\n
\n

Data providers bridge the qualitative question, \u201cDoes this company violate ethical labor practices?\u201d to a binary output that can be filtered. In the case of the environmental footprint, the data provider must first define \u201cWater intensity\u201d and answer that question with an absolute or relative number that an asset manager can use in the portfolio construction process. While environmental impacts can be easily quantified such as CO2 emission or water usage, quantifying social impacts still remains a challenge.<\/p>\n\n\n\n

ESG ratings are based on many facets, much like bond ratings, and draw on qualitative aspects, whereas ESG metrics are specific
and one dimensional, like CO2, water and waste intensity. Both ESG ratings and metrics show the current state of a company and a focus on SDGs gives a future-oriented perspective.<\/p>\n\n\n\n

The shift towards more and complex data plays right into the hands of quantitative asset managers who know how to turn vast amounts of data into useful information and how to adapt it to customers\u2019 preferences. Whereas in the past many believed that ESG and quant did not mix, today quantitative asset managers are increasingly competitive and may even have an advantage when it comes to the integration of ESG into investment processes.<\/p>\n<\/div><\/div>\n\n\n\n

<\/div>\n\n\n\n
Multiple sources of data used in ESG integration<\/h5>\n\n\n\n
\"\"
Figure 2: Quoniam Asset Management<\/figcaption><\/figure>\n\n\n\n
<\/div>\n\n\n\n
ESG has many facets \u2013 Correlations are low between factors and data providers<\/h5>\n\n\n\n
\"\"
Figure 3: Source Quoniam Asset Management<\/figcaption><\/figure>\n\n\n\n
\n


The most qualitative part of an ESG process is engaging directly with companies to push for sustainable corporate development. Typically, quantitative asset managers do not engage with the companies in which they invest. We have the advantage of partnering with the dedicated ESG team of our parent company Union Investment with regards to ESG research and advisory as well as engagement services. We are also able to quantify and make use of information generated in meetings. For example, from dialog with companies on two-degree alignment we gain useful information on how to evaluate the topic in a systematic way. The same goes for patterns in proxy voting.<\/p>\n<\/div><\/div>\n\n\n\n

\n
5.) How does ESG integration work in a quantitative investment process?<\/h5>\n\n\n\n

We integrate ESG criteria during portfolio construction togetherwith our forecasts for alpha, risk and transaction costs. We set rating or metric levels as absolute or relative constraints in our portfolio optimisation tool. We optimise the portfolio with regards to:<\/p>\n\n\n\n

<\/p>\n\n\n\n