Deutsche Bank AG (NYSE:DB) bets on ESG and quant for superior returns
In September 2014 a report from the specialist quant asset management firm Arabesque Asset Management created a stir among those interested in sustainability in global finance. It was part of a steadily rising tide of investor interest in environmental, social and governance (ESG) data for superior returns. On its publication, I covered it on Forbes.
Yesterday (eds June 20) Deutsche Bank AG (NYSE:DB) announced the launch of a new family of investment products that will track the returns of indices designed and operated by Arabesque, which is based in Frankfurt and London. Describing itself as “the world’s first specialist ESG Quant asset management firm, Arabesque said its mission was “to make sustainable investing attractive and available to all investors.”
“The aim of the partnership is to allow investors to invest in a sustainable way without having to sacrifice return performance. There is a widespread assumption that sustainability comes at a cost, which is a reduced rate of return. But Arabesque’s combination of ESG selection criteria and performance has challenged that assumption” said Sean Flanagan, Head of Equities & Hybrids Structuring Europe at Deutsche Bank AG (NYSE:DB).
“Deutsche Bank has seen a strong increase in demand for ESG based products over recent years. We see the cooperation with Arabesque as a crucial step to develop our ESG-footprint and continue building our ESG platform. The topic will keep growing in relevance and Deutsche Bank wants to play an active role in this development”, he added.
Arabesque takes its name from the description of geometric art built with mathematical equations. Screening thousands of stocks which comply with its corporate responsibility guidelines and demonstrate strong ESG performance, it integrates ESG data with quantitative investment strategies. A range of non-ESG filters are then applied to identify which companies also score highly on other criteria- such as financial stability, earnings momentum and market sentiment.
By its criteria, Unilever (LON:ULVR) – one of the world’s leading suppliers of food, home and personal care products which has also set itself a clear target: to be ‘carbon positive’ in its operations by 2030 – achieves a high ESG score. On the other hand, Canada’s Valeant Pharmaceuticals International Inc (NYSE:VRX) and the solar energy company Sun Edison Inc (OTCMKTS: SUNEQ) are examples of those that do not.
“The integration of non-financial information into the investment process is fast becoming a global trend and today, people care more than ever before about precisely how financial return is generated” said Omar Selim, Chief Executive Officer at Arabesque Partners.
He quoted GRI’s sustainability disclosure database: “This trend is gathering momentum: 5,336 companies published a sustainability report in 2014, up from 294 in 2004. Investors can now clearly see that ESG and financial performance go hand in hand.”
In March this year Deutsche Bank, criticized alongside other big banks for coal finance - as covered here on Entelligent.com - began to rethink its stance on climate-related financing. This emphasis on building new ESG products sheds some light on of how swiftly it may be turning around in its emphasis, driven by demand.
According to a report in the Financial Times, Deutsche Bank is aiming to raise €1billion ($1.13 bn) through these products in the next two years.
“ESG-based investing is one of the most significant trends in financial markets for decades. Over time, it will not be a question of whether investors will integrate ESG information in their portfolio selection but moreover when, how and with whom” said Andreas Feiner, Head of ESG Research and Advisory at Arabesque Partners.
Dina Medland is an independent writer, editor and commentator with a strong focus on issues around corporate governance, ethics, the workings of the boardroom and sustainable business. She is on the team of contributors to @ForbesEurope and is an ex-Financial Times staff member who has been a regular contributor in recent years. Further details about her background and a portfolio of work – including her commercially sponsored blog ‘Board Talk’ are available on her website http://www.dinamedland.com