“Many people think that quants can’t engage [on ESG],” Moniz said. “But we have dispelled that myth, showing the value of a systematic understanding of data and using AI [artificial intelligence] to create corporate engagement at scale.”
Moniz joined the Boston-headquartered quant shop, Acadian Asset Management, as responsible investment director in March 2021, bringing the ESG data science skills he had honed in previous roles at Putnam Investments and Deutsche Bank.
Under his watch, Acadian has fine-tuned its existing responsible investment integration strategies into an AI-driven analytical process capable of sifting through oceans of communications from 40,000 plus companies to build an almost real-time picture of corporate ESG status.
In a release last week, he said the data-based approach – using techniques such as natural-language processing (NLP) and machine-learning to interpret structured and unstructured corporate information sources – yields much more robust, useful results than those produced by the various (often-conflicting) ESG rating services.
“Questions of whether and how we can actually improve investment performance with ESG-related information have been obscured by the proliferation of uninformative and misleading content and claims,” Moniz said.
“The inconvenient truth is that readily available ESG data, including off-the-shelf ESG ratings, is unlikely to be of investing value for investors seeking to maximise risk-adjusted returns. It would be surprising if it were.”
He said standard ESG ratings rely on ‘subjective’ interpretations while suffering from persistent data issues that quant-based approaches are well-placed to overcome.
“… there is enormous overlap between ESG-related information and the types of alternative data now being exploited by systematic investors, examples of which would include free-form text in corporate communications, regulatory filings, and media reports. ESG-related alternative data is often unstructured, ungoverned, and ‘big’,” Moniz said.
“While those characteristics make the information difficult to work with, that challenge represents the seed of opportunity for systematic investors.”
Acadian can already point to corporate engagement wins and ESG insights that have flowed through to portfolio returns, he said.
Although the manager does not report ESG impact as a separate factor – embedding the process across the entire investment strategy – Moniz said internally the results show a positive impact on returns.
But perhaps of more interest amid a growing regulatory panic, the Acadian process has shown promise in identifying both corporate leaders and emerging ESG risks in the 40,000 plus global stock universe under its purview as well as offering a unique take on ‘greenwashing’.
For example, the firm developed an AI-based system last year, dubbed ‘ENGAGER’, to screen corporate communications for signs of greenwashing via language clues picked up through NLP analysis.
“By systematizing the search for greenwashers, ENGAGER allows us to screen through large numbers of holdings to identify the most appealing targets for engagement with respect to decarbonisation and other ESG themes,” an Acadian report published this June says.
However, Moniz said Acadian is primarily interested in focusing its quant powers on improving ESG engagement on issues such as decarbonisation, modern slavery and staff diversity rather than ‘naming and shaming’ laggards.
In the June report, Acadian says: “While some investors may associate ESG engagement with discretionary and concentrated investing approaches, the systematic investing process offers two important benefits in the engagement context. First, the same scalable analytical toolkit that facilitates returns forecasting and risk analysis across vast investment universes can also be applied to identify and prioritise engagement targets across broad sets of holdings.
“Second, sophisticated methods, including the analysis of alternative data with AI-based methods, can generate evidence of ESG-related concerns that more traditional methods would miss. Contrary to popular perception, therefore, the systematic investing approach offers both a natural setting and an effective toolkit for a distinctive form of ESG engagement.”
The manager has garnered interest from a number of institutional investors, including in NZ and Australia, looking to use the quant ESG process across their own portfolios.
Moniz visited Australia and NZ recently to showcase the system to several local institutions.
Founded in Boston 35 years ago, Acadian currently boasts about A$130 billion in assets under management across its global equities and alternatives portfolios. The manager has a couple of mandates in NZ, including on the Mercer international shares menu, and also offers some strategies to the wholesale market on platforms in Australasia.