As with all our investment processes, we are constantly looking to enhance the integration of ESG considerations into our quantitative and smart beta funds. As mentioned, we use a proprietary ESG signal to identify ESG catalysts. We have spent a lot of time refining this model, which combines a methodological quantitative approach with qualitative/independent thinking.

To ensure that our model continues to add outperformance (alpha) over time and to meet evolving sustainable targets, we are constantly researching and testing for new signals. For this we need consistent, high-quality data. Over the past 11 years, our Responsible Investment team has assessed some 20 service providers offering ESG-related analysis.

Old Mutual Investment Group has also established an Artificial Intelligence (AI) committee tasked with exploring ways to enhance our proprietary ESG quant signal and model. The team is also currently undertaking a big data AI project that is looking to derive quantitative signals through machine learning across our ESG data suite. In analysing a wide range of metrics, the aim is to find alpha signals by identifying consistent trends within the South African and global markets, as well as identifying correlations between metrics.

PUTTING A STAKE IN THE GROUND

Another key project we are working on is developing a South African low-carbon and socially inclusive listed equity benchmark. As a leading innovator of locally based ESG investment products, we find that the absence of an ESG benchmark is a huge barrier to product innovation – in terms of appropriate portfolio construction and performance measurement. With our long track record of analysing ESG metrics and integrating these considerations into our investment processes, we believe we have the data, the tools and the expertise to develop this ESG benchmark.

The fact that the SA listed market is dominated by resources and other carbon-intensive companies means that this benchmark cannot be exclusionary. We plan to conservatively evolve the benchmark towards net zero – aiming for a 50% reduction in carbon emissions by 2030 and net zero emissions by 2050. This process will also include the social impacts of decarbonising our economy – balancing the environmental necessity with the socio-economic implications. We believe this is possible and that developing this benchmark will be further supported by the investment industry’s collective active stewardship approach of engaging listed companies on their strategies and targets to reach a socially just net zero goal by 2050.

This benchmark will further align the local listed market with worldwide efforts to limit global warming to 1.5oC. We also believe that having a measurable stake in the ground will further propel companies to start shifting their revenue sources in line with the green economy.

FINDING FORWARD-LOOKING ESG SIGNALS

Much of the ESG data we use focuses on the current situation and a company’s past record. We are looking to create a metric that identifies those companies transitioning their revenue lines to a more inclusive and greener economy. This is similar to forecasting a company’s revenue into the future, where we look at a combination of data, stated intentions and assumptions. At the moment, our forward-looking ESG analysis is subjective and data collection is manual and company specific. We want to make this process more systematic in terms of developing an objective signal that we can easily use through all our portfolio construction processes.

At Old Mutual Investment Group, we intend to remain leaders in responsible investment (in early 2022, we were recognised as one of the top three ESG investment managers in South Africa¹). Our country is benefiting from very strong global tailwinds in the ESG space and we find that many of our clients see the benefits of investing in greener, more socially inclusive companies. Our clients realise they are getting the same, if not enhanced, performance by investing in a portfolio of higher-rated ESG companies. This places the responsibility back on us to make sure our current and new products are aligned with the ESG outcomes our clients are seeking. That is why we are phasing ESG objectives in through all our portfolios. We have the data and the models to integrate this in a detailed and seamless way that does not compromise investment returns and, in fact, potentially enhances returns.

¹ Sustainable Asset Manager Award presented by the ESG Annual Asset Manager Survey 2022