A recent CAIA Association and UN Principles for Responsible Investment (PRI) event, hosted by Man Group, explored why and how quantitative investment managers are using ESG factors in their investment processes. The impetus comes partly from pension funds. Some 90% of them have a Responsible Investing (RI) policy, but less than 50% have formalised guidelines, with only 20% currently using ESG to guide allocations, according to Redington’s Tom Wake-Walker. These percentages should grow. Pension fund trustees think that incorporating ESG factors, such as climate change, into the investment process, is completely consistent with their fiduciary duty, according to HSBC Pension CIO, Mark Thompson.

The perception that discretionary investment processes are more amenable to ESG, than are quant processes, need not apply. Nearly half of assets run by Man Group’s fundamental quant unit, Man Numeric, have an ESG component, and the firm has been employing ESG factors since the mid-1990s, says CIO Rob Furdak.

Data is a greater challenge for quant strategies however, as many are exposed to thousands of companies: far more than some discretionary strategies. Man Numeric combines data from specialist providers (such as MSCI, Trucost and Sustainalytics) with its own analysis of new and unstructured data. Albertus Rigter of LGT Capital Partners notes that ESG data is not always as clean as he would wish, partly as some companies do not disclose enough detail. Systematica’s Gregoire Dooms sees very limited standardisation in ESG data but does not judge it to be any worse than other datasets such as financial statements. Louise Dudley of Hermes Investment Management finds data quality is generally improving and is often better in the UK.

Albourne Partners is expanding its ESG questionnaires from manager level to fund level. Albourne’s Avgustina Sarkizova observes that firms may start with vendor ESG ratings; then move onto separate ratings for the ‘E’, ‘S’, and ‘G’ components, before developing more granular ESG approaches that hone and refine data into hundreds of ESG signals. Dr Damian Borth, of the German Research Centre for Artificial Intelligence (DKFI), is applying deep learning, machine learning and semantic techniques to define ratings. He also uses public satellite data to measure deforestation. AQR’s Lukasz Pomoroski argues that managers need to dig deeper and unearth information such as non-public data on corporate governance, to glean stronger insights.

RobecoSAM’s Ruben Feldman suggests that ESG factors usually correlate with the quality style factor in equity investing and prefers to look at the rate of change: identifying ESG improvers.

Systematica can short stocks with negative ESG scores while other managers simply exclude them from their entire investment universe

Applying ESG to macro investing in currencies, bonds or commodities is different from single corporate securities. Man Group’s Antoine Forterre points out that World Bank rankings can be used for some macro markets.

Clearly, a proliferation of diverse approaches is rapidly evolving. The Hedge Fund Journal expects to publish more interviews and contributed articles on ESG and quant.