Sustainalytics, a leading global provider of ESG and corporate governance research and ratings, today launched ESG Signals, an innovative quantitative tool that provides securities-level financial risk and opportunity signals based on environmental, social and governance (ESG), trading and financial data. ESG Signals analyzes thousands of correlations between variables over time and applies machine learning to extract meaningfully predictive risk/opportunity signals.
Sustainalytics developed ESG Signals in collaboration with Advestis, a FinTech company that specializes in machine learning and big data techniques for asset management firms. ESG Signals combines seven years of Sustainalytics’ ESG research on more than 1,600 companies with trading and financial data from Advestis to provide heads of research and portfolio managers with a portfolio monitoring, alerting and investment decision support tool. In addition, asset managers and index providers can use ESG Signals to develop new products.
For every portfolio security, ESG Signals delivers either an opportunity, neutral or risk signal output. To test the findings, Sustainalytics and Advestis applied ESG Signals to a large cap, market weighted index. The index was adjusted to apply three ESG strategies: normative exclusion, best-in-class selection and a combination of the two. The reweighted indices outperformed the benchmark between 110 and 430 basis points annually, depending on the frequency of rebalancing adopted.
“For almost 25 years, Sustainalytics has been at the forefront of supporting ESG-related investment strategies,” said Sustainalytics’ President and Chief Operating Officer, Bob Mann. “ESG Signals further underscores our commitment to innovation by exploiting big data techniques, quantitative modeling and machine learning to examine the links between ESG and financial performance factors. Our goal is to help investment managers identify and leverage ESG indicators with the most meaningful predictive value.”
To date, ESG integration strategies have been largely qualitative in nature, primarily implemented as part of a qualitative process for risk mitigation. As ESG factors become increasingly important considerations among mainstream investors, asset managers are looking for investment tools that have the ability to consistently and algorithmically analyze performance-based correlations to identify the most influent variables and in what circumstances they are most influent.
“ESG variables provide additional information not fully captured by today’s financial or trading variables,” said Advestis’ CEO Christoph Geissler. “Leveraging Sustainalytics’ high quality research and extensive ESG experience provides investors with a more comprehensive picture of a portfolio company’s risks and opportunities. We are glad to be partnering with Sustainalytics to develop ESG Signals and applaud them for their commitment to product innovation.”
For more information on ESG Signals, please visit here.