Stockholm (NordSIP) – On her recent trip through the Nordics, we caught up with Kathryn McDonald, Head of Sustainable Investing at Rosenberg, which is part of AXA Investment Managers. She shared her journey into sustainability, which emerged during her 18-year career at Rosenberg, a US-based firm specialised in quantitative strategies. Mc Donald also highlighted her latest project, which uses the UN’s sustainable development goals (SDGs) as a base for quantitative models to help harness billions of dollars in public market investments to make a dent in the most pressing issues the world faces today.
Data needed from Down Under
The first time McDonald encountered the challenge of practically integrating sustainability into her investment practice was when she went to represent Rosenberg as Head of Investments in Australia in 2008. “I had always been interested in ESG and sustainability,” says McDonald. “But that’s the first time I was exposed to the expectations of the market and the limits of what we can do. Rosenberg is essentially a quantitative firm, and therefore we are tied to the kind of data can obtain. At the time, specialised data providers were very fragmented and their offering was not as easy to come by as it is today. Our usual data providers were not involved or only marginally. Now they all propose extensive data in the field.”
“Over time, we have become more and more convinced about the idea of integrating sustainability because whenever we ask ‘What is your best investment idea?’ ESG is always part of the answer.”
The evolution of the quality and availability of data over the past ten years has truly transformed the possibilities quantitative managers have to integrate such considerations in their portfolio. Rosenberg is now wholly owned by AXA investment managers, and McDonald is back in natal California, focusing on her role as Head of Sustainable Investing on the quantitative side, while she and her team can leverage off the expertise of the AXA IM team in Paris.
An essential part of financial analysis
“Over time,” McDonald continues, “we have become more and more convinced about the idea of integrating sustainability because whenever we ask ‘What is your best investment idea?’ ESG is always part of the answer. I believe it’s not just a trend. ESG-data represents economic information about companies, which can potentially change their fair value or earnings trajectory. While developing our quantitative models, we strive to answer the question: ‘How can we build a more robust assessment of the threats and opportunities a company faces.’ E, S and G factors are not well represented in traditional financial statements. They are complementary, for example, when we model earnings quality. Hence about a year ago, we decided to integrate ESG in all our strategies.”
UN SDGs at the root of new quantitative strategies
“Now that we have completed this important step, we also want to develop UN SDG-focused strategies. The latest development I am looking at, and talking about with investors in the Nordics this week is related to the SDGs. It’s exciting times because we are adding to quantitative strategies ideas that have been essentially in the realm of private equity until now. How can we best bring these ideas into the listed equity space? As a firm, we believe that by using the full heft of the public markets, we can move the needle on the SDG themes. This would mean moving billions of dollars towards these goals. That’s what it will take to make a dent in some of the very challenging issues that the SDGs address.”
“The selection is not always straightforward, and we need to apply some art and not only science at the moment.”
Let’s look at what it means concretely: “First, we have worked with our data provider to obtain sales information mapped to single goal or outcome. For example, a company generating sales of products and services related to water treatment is associated with goal 6 “Clean water and sanitation. We are mindful of the fact that many companies have sales that relate positively to one goal but in other parts can be in the way of the same or another goal. Food companies, for example, can be tricky. They facilitate access to basic nutrition in some disadvantaged area, but in other parts of the world, they sell sugary drinks or fast food. Generally speaking, we would like to minimise exposure to companies that are working against the goals. The selection is not always straightforward, and we need to apply some art and not only science at the moment.”
Rosenberg’s new strategy relies on selecting an appropriate universe, which requires a delicate balancing act between selectivity and breadth. “We apply our positive criteria, and select the companies that provide goods and services aligned with a selected set of SDGs. This selection needs to be narrow enough to be credible, but the universe needs to be broad enough to build portfolios that will manifest strong financial performance. The strategy that we are discussing and sharing right now relies on four key pillars: Health, Water, Environment and Food. With those, we think that we have a universe that meets this range of criteria.”
“Just because a company is a good impact company is not necessarily a good investment. That’s where the quantitative stock-picking plays its role. We use our time-tested stock-picking model in the universe we have created. From experience we have built over time, we can infer based on statistical analysis, that if the universe is broad enough, the models should produce sound results.”
Harness the power of public investments
“Why should investors park their values at the door when they go into public equities? We should help them employ the strength of the broad public equity market.”
The most critical step for McDonald is to match investor’s expectations. “We want to know from a practical sense if this is relevant for our client. From what we have heard this week, the feedback has been positive. For certain large institutions, we may need to work in a tailored way with them to get that starting universe right. It doesn’t need to be ‘one size fits all’. It is crucial that we find the right product, especially for large investors who are already committed to sustainable investment principles, through private equity or green bonds. Why should they park these values at the door when they go into public equities? We should help them employ the strength of the broad public equity market.”
The quantitative integration of ESG at Rosenberg and AXA Investment Managers will be presented and discussed at a event on 17 May presented by NordSIP, in association with another quantitative fund management firm, Stockholm-based IPM. If you are interested in joining us, please let us know!