By Paula Singliarova
We are in the middle of annual general meetings season, where companies present their annual reports and shareholders get to vote on key matters. Financial institutions have found themselves at the forefront of sustainability discussions, engaging with corporates and influencing their decision-making on these matters. With good governance, environmental and social topics becoming increasingly prominent around the world, it is in an investor’s interest to oversee how investee companies manage sustainability risks for the benefit of their portfolios and for the benefit of the planet. Engagement with companies is the most effective way to convey change- treating sustainability as a real-world issue rather than merely a portfolio optimisation problem.
The challenge with systematic strategies is that the rules guiding investment decisions are vested in the investment model, and PMs are not taking discretionary decisions. As such, you cannot often apply the traditional engagement tools available to investors, i.e.:
- Filing a shareholder resolution to escalate matters
- Vote against management of a company during annual general meetings
- Divestment, if an engagement with the corporate fails
The reason for this challenge is that the equity ownership required to pursue the above-mentioned approaches means you need to be invested in the company. As a quantitative asset manager, you simply don’t know if you will be invested in the company at the time of their annual general meeting. The market conditions can change, and the company can be dropped from the portfolio as part of the model recalculation. Not to mention the turnover, which is precisely the reason why quant houses are sometimes discouraged from getting involved with engagement initiatives.
How did we approach this?
Arabesque is built on two pillars: sustainability and AI. These two pillars form the foundation of our investment philosophy and are reflected in the investment process of all our strategies. Our shareholders place their trust with Arabesque to manage their money in line with these principles: by directing capital towards companies that are fit for future, while utilising the latest AI technologies.
As a company with sustainability at the core of our mission and as manager with fiduciary duties, we believe that quantitative houses do have a role to play. We currently utilise the following approaches to integrate stewardship considerations:
- Proxy voting: Voting is an obvious place to start but is often dismissed as a tick-boxing exercise. However, not all votes get cast as many can get lost in passive products – leading to the loss of shareholders having a say in company’s decisions. The power of proxy battles should not be underestimated. For example, in 2021, investors voted out 3 of the 12 Exxon Mobile Board Directors due to their unsuitable experience to lead the oil giant in the transition to a low-carbon economy. Therefore, we need the largest shareholders to act and smaller shareholders to voice their concern too. The fund behind the Exxon engagement campaign held only 0.02% of the company but was able to create significant changes at the top management. At Arabesque, we cast votes for companies in all our funds and in line with ESG Voting Policy. Our sustainability team monitors the votes on daily basis and consults the Arabesque Sustainability Committee.
- Collaborative engagement: Investor engagement campaigns are likely to be more effective when supported by larger number of financial institutions. Collaborative initiatives provide space for idea sharing, combined analysis and fosters an environment of financial institutions working towards the same goal. The obvious benefit of collaboration is the leverage you gather by combining the AUM of various asset managers and owners. Arabesque is currently part of various collaborative initiatives via ClimateAction100+, Share Action and the Investor Decarbonisation Initiative. We often don’t hold positions in the companies they engage with, but we leverage our brand and provide data for further analysis.
- Our engagement campaign: Arabesque launched an engagement campaign focusing on the improvement of GHG emission disclosure in the European technology sector. With net-zero commitments being announced every week, we need data to assess them as what cannot be measured, cannot be managed. Given our expertise in sustainability data, we believe that this is an area, where we can play our part in the world of investor engagement initiatives. Data availability and quality is a key concern to effective performance of the investment strategy and in turn a key concern to our shareholders who trust us with their money. The campaign was supported by investors with $970bn in AUM.
Further details and methodology behind our campaign will be explored in our next newsletter – stay tuned).
The verdict: do quants have a role to play?
The answer is absolutely. We are aware, that out efforts are only part of a larger puzzle of actions required for the global just transition to low-carbon economy. But the journey is long and complex, so we need all hands-on deck to get going, including the ones of quant managers.
Will Arabesque be able to move the needle? Probably not- but we cannot afford to wait as the risks of inaction is greater.