A data-driven, quantitative approach to sustainable investing is a must to keep pace with an increasingly complex investment landscape.

As the demand for sustainable investments increases, more investors are turning to quantitative methods for portfolio construction and impact measurement, a move that augurs well for the industry, experts told AsianInvestor. The trend is picking up in Asia where data availability and inconsistency have long been a major challenge for players in the environmental, social, and governance (ESG) space.



Chew Yee Kiat Eastspring

Investments “Data is a key input to help investors make ESG investment decisions and for quantitative investors to develop metrics that effectively capture how companies are making a positive impact, developing their ESG best practices or possibly lagging on these measures,” said quantitative analyst Chew Yee Kiat of Eastspring Investments, a global asset manager that is part of Prudential plc. He said one of the biggest challenges in ESG investing has been in integrating data into investment strategies because of the inconsistencies among rating agencies and the lack of clarity in the standards and metrics.

However, the ESG data landscape has improved – especially in Asia which has a reputation for being an ESG laggard – as more reliable and comparable datasets have become available due to higher disclosure requirements in recent years.

As a result, it is no longer sufficient to use broad exclusion screening measures to develop a low carbon portfolio, for instance, when a more quantitative approach is possible, he said.

For example, instead of merely excluding the top 10% or 20 % of emission producers based on their ranking in the MSCI Weighted Average Carbon Intensity (WACI) – an estimation of the index’s exposure to carbon-intensive companies – to arrive at a low carbon portfolio, a nuanced, quantitative approach would yield a more balanced result, he said.

Carbon intensity is defined as the amount of carbon emissions caused by a company (metric tons of CO2) divided by its revenue (USD millions). It is a rough measure of the amount of greenhouse gas that a company emits relative to the sales it generates from these emissions.

Chew said the quant approach optimises the use of carbon intensity scores along with other metrics such as market capitalisation, liquidity and dividend yield, as well as specific objectives such as maximising expected returns and minimising portfolio volatility.

It can even be designed to meet targets such as a specific WACI score and relative weightings for selected countries and sectors to ensure the result would not be significantly underweight or overweight in certain sectors, he said.

Using this approach, his company has been able to construct portfolios for their clients with more attractive characteristics than the exclusion approach, while ensuring that the results are not significantly skewed in any sector.

For instance, the exclusion approach would have normally resulted in the weeding out of stocks in the utilities, energy, and materials sector as they tend to have the highest carbon intensity scores, he said. But the outcome would be a low-yielding portfolio with higher volatility without the utility companies which are typically good dividend plays operating in stable environments.


Natasha Garcha IIX

The quantitative approach has also been used by other ESG players such as social bond issuer Impact Investment Exchange (IIX), a leading Singapore-based sustainability financing company, to keep a check on impact washing – the practice by companies of burnishing their ESG reputations.

“One way IIX has worked around it is ensuring the beneficiaries at the last mile are given a value and a voice in the impact assessment process by doing ‘verification’ using our digital impact assessment platform,” its senior director for innovative finance and gender-lens investing specialist Natasha Garcha told AsianInvestor.

She said IIX was able to collect quantifiable data from the affected community via digital surveys leveraging mobile technology even during the period of Covid-enforced travel restrictions.

“This ensures a data-driven, evidence-based approach to impact reporting which is very important for our investors who want a social return on their investment or who want to understand how the SDGs – sustainable development goals of the United Nations – are advanced at the grassroots level,” she said.

She said IIX goes to a level of detail that includes collecting data directly from smallholder farmers in Cambodia, women micro-entrepreneurs in Indonesia, and women using clean energy products in the Philippines for its reports to investors.

“There are billions going into sustainable finance and it’s no longer enough just to hire a third party to check if you align with standards or basic ESG requirements,” she said.

The growing acceptance of the quantitative approach in ESG investing is also seen in the case of the Abu Dhabi Investment Authority (Adia), one of the world’s largest sovereign wealth funds.

It has assembled a 50-strong research and development team comprising physicists, academics, and data experts to provide strategic advice and quantitative analyses to decision-makers.

While investor demand and growing awareness of ESG investing remain the key growth drivers, a  data-driven, quantitative approach will give the industry the extra push.

“Asia is improving more rapidly than commonly perceived on ESG investing. We are beginning to see more demand and awareness on this front in the region,” said Chew.


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