A Machine Learning-Based Approach to Thematic ESG Investing: Case Study in GEO (Green Economy Opportunities)
Thematic Research 13 min
February 2023
Responsible Investing
Investors typically misprice the financially material aspects of sustainability—behavior which provides a source of potential alpha.
The Benefits of a Systematic Approach
Objectivity - It is well known that there is a relatively low correlation across the major data vendors’ ESG ratings highlighting subjectivity and measurement error. A systematic approach based upon empirical evidence overcomes these concerns.
Proprietary signals - Our investment team includes experts in machine learning, data science techniques, and alternative data to create forward-looking material ESG signals. We do not use ‘off-the-shelf’ scores within our investment process.
Financial materiality - We pay careful attention to the formulation of ESG signals across sectors, regions, and time based upon their efficacy.
Disciplined investment decisions - A key strength of our process is the ability to weigh the relative importance of ESG metrics alongside company fundamentals.
Responsible Investing Pillars
Proprietary and data-driven ESG signals built from unstructured data and machine learning to enhance the prediction of risk-adjusted returns
Ability to integrate sustainability preferences (exclusions, tilts, decarbonisation) typically with negligible or measured impact on alpha exposure
Engagements playing to the strength of data analysis and sophisticated quantitative insights
Stewardship
Engagement aligns with our investment conviction themes and is further informed by escalating ESG controversies and thematic responsible investing trends.
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A systematic approach to engagement
Quick Takes
We consider utilities’ impact on the carbon intensity of global benchmarks. In more recent periods, low volatility managers have looked to other, more effective diversifiers to reduce portfolio risk. However, as the outlook for utilities improves and investor demand returns, decarbonization efforts will require prudent deliberation and sophisticated methods to balance decarbonization priorities and risk-reward objectives. Link below for the full piece.
Read MoreWe highlight potential environmental policy changes in the U.S. under a Biden administration. Given the uncertainty that remains, particularly with yet-to-be-resolved Congressional leadership, we also discuss the importance of a nuanced and dynamic approach to incorporating the impact of environmental policy change when it occurs.
Read MoreWe believe that certain ESG considerations influence corporate success and investment performance, but amid relentless hype and pressure to participate, many approaches have been brought to market that are based on imprecise foundations and rudimentary implementations.
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