Our mission is to offer data and indices that help people and the planet. It’s not an afterthought; it’s not an alternative. It’s our core strategy, and we’re fiercely proud of it.
We believe investors don’t have to sacrifice financial returns to make a positive impact on the world. Every index or product we offer- or will ever offer- will be offered with the goal of helping investors invest sustainably while beating benchmarks.
OWL Analytics believes that financial markets constitute one of the greatest mechanisms for creating positive change- not just for investors, but for the world at large. We want to help make that power as widely accessible as possible so that concerned investors can extend their reach and impact.
OWL ESG scores and rankings, based on the most thorough data set available, can be used to ESG-optimize any investment strategy. Our data and indices will allow a wide range of investors the opportunity to upgrade common portfolio asset categories to ESG-optimized versions. This allows investors to allocate capital to strategies they already use while at the same time diverting a greater portion of the capital to better corporate citizens, helping make a positive impact on society and the world.
ESG stands for environmental, social, and governance. Usually ESG refers to data about how a company manages their environmental footprint, how fairly a company interacts with their social ecosystem, and how well a company governs itself to protect shareholders. ESG can also refer to scores or ratings based on that data, or to investment strategies that incorporate any of the above.
ESG data provides remarkable insight into the risks and opportunities of investing in a specific company. Companies that reduce their ESG risks are on the whole more sustainable than their lower-scored peers; more sustainable companies will generally financially outperform their peers over time. The data unequivocally supports this conclusion, which is why institutional investors have been consulting ESG data vendors for years to analyze their investments.
Additionally, ESG can help identify those companies which behave as better corporate citizens — those who minimize their environmental footprint, treat employees and other stakeholders fairly, and operate with honesty and transparency.
Combining this elevated sustainability with ESG’s potential to enhance performance is a powerful tool to allocate investment dollars more positively. We want to improve the world now, for our children, and for future generations, and believe ESG-optimized investment products have the unique power of aligning self-interest with helping the world. The profit motive can help deploy capital for wider beneficial impact.
One word: Materiality. Each of the literally hundreds of ESG issues represents an opportunity for a company to reduce risk, increase profit, or both. Every industry has its own set of ESG issues specific to the operation of that industry’s businesses. ESG reporting, research, and analysis work toward the goal of helping businesses operate better and grow for long term success.
Sustainable, responsible, and impact investing means investment strategies that consider ESG factors with the goal of financial return and positive social impact. When used to stand for socially responsible investing (a term used less and less frequently), it has often meant screening out companies or industries deemed by some to be harmful to society, but we use it only in the first sense.
Impact investments invest in companies, organizations, and funds with the goal of generating social and environmental impact alongside a financial return.
ESG scores are primarily generated by research companies like OWL Analytics. We create proprietary ESG scores that cover the majority of public companies. Most ESG research firms employ a team of analysts that comb through sources (including company filings, voluntary corporate social responsibility disclosures, consultants, news media, NGOs, watchdog groups, and other public information sources) to rate how companies are managing their ESG issues.
These issues have been developed and proposed by standards boards, public interest groups who research how industries and businesses interact with their stakeholders and the planet.
There are some challenges to using ESG well, though they’re clearly outweighed by the benefits.
The challenge of using ESG is mostly due to subjective selection of what ESG data to use and how to apply it when analyzing whether to invest in a company. These same challenges exist in other methods of fundamental investment research. For instance, analysts give different weight to standard metrics (like price-to-earning, sales growth, management experience), but each of these points is still valuable alone or taken as a whole.
Like all of these metrics, all ESG research provides valuable insights into how a company is managing their material risks and opportunities. Undoubtedly, more data and more analysis is better than less; some data and some analysis is better than none.
Simply put, ESG is merely data. Good data is a powerful tool in the investor’s toolbox, but it needs to be wielded properly for good results. Existing ESG-themed indices and funds all apply ESG in different ways, and heavily employ exclusionary tactics. As a result, those products are not an effective gauge of ESG’s effect on performance.
Companies that focus on their ESG performance are generally better managed, with processes and procedures that promote the long-term viability of their businesses. That said, ESG-related practices are only a subset of what builds value in a company. There will always be short-term reasons why companies with lower ESG scores may outperform — e.g., the release of a new product, strong marketing, temporary cost-cutting, market psychology, and so on.
Over the long term, we believe consistency is a stronger strategy. Higher-rated companies that adopt accountable and repeatable processes exhibit operational excellence.
Most individual investors have limited options for using ESG in their investment decisions. High net worth individuals and institutions may pay for access to ESG data, hire a sustainability consultant to create a suitable portfolio, or even engage the services of an index provider to create a fund for their institution or like-minded investors.
Retail investors can choose from an increasing number of ESG-themed ETFs or other funds. Not every fund will suit every investor’s tastes; read the prospectus carefully to understand how the index is determined, how the methodology affects exposure and diversification, and what risks that entails. Few ESG-themed funds have achieved mainstream status, many struggling against the market’s perceptions of what can be seen as a niche product. But as ESG gains traction and is better understood, funds which include ESG considerations will become more mainstream.
Not if, but when. ESG standards continue to evolve. As the ESG industry has developed, standards organizations have focused more and more on ESG issues that are material to company performance; they and the ESG research companies continue to perfect their craft.
We believe these trends will continue. While there is always the chance that new standards will cause a temporary shift in relative ESG scores, responsible companies on the whole will continue to respond and rise to the top.
We believe an index based on evolving standards should likewise improve over time.
Generally, index holdings are determined by rules our clients have chosen to govern the indices we build for them. Depending on client requirements, these indices may or may not hold companies that are perceived to be either socially responsible or socially irresponsible. Generally, these indices tend to closely track benchmarks, but are optimized to have ESG characteristics better than the benchmark. For the OWL ESG Benchmark Family of Indices, which we jointly own with our partner Axioma, we’ve decided to utilize a multi-factor approach to choosing securities with the goal of delivering both improved performance and a weighted average ESG score greater than benchmarks.
Market cap has little or no bearing on company performance. Our indices utilize a multi-factor approach to index creation shown through academic research to manage the risk inherent in how portfolios are constructed. This data driven, academic approach to building indices is at the core of how we design indices. For more information on our multi-factor indices built with our partner Axioma, click here.
OWL- with our partner Axioma- does offer a series of ESG-optimized indices designed to have low tracking error to market-cap weighted benchmarks. To find out more, click here.
A big part of our business is building indices for clients. These indices sometimes eliminate low-scoring companies or disagreeable companies. For members of the OWL Benchmark Family of Indices, we’ve chosen to optimize by ESG scores, which sometimes eliminates companies with lower ESG scores and sometimes lowers exposure to negatively scoring industries. However, we believe wholesale elimination is not an advisable approach.
Our mission is to identify companies that do a better job managing their ESG risks and opportunities, independent of industry or business model. These companies show better long-term viability compared to their peers. Compared to peers, they also actively work to reduce their environmental footprint, operate their businesses in a more socially conscious fashion, and manage themselves with strong governance. This makes the world a better place.
Our inclusive strategy maintains good market exposure, reducing risks inherent in strategies that screen our certain industries or companies. By optimizing our indices in favor of higher ESG scores, we reward good behavior; by reweighting as we update scores, we reward improvement.
It may, but those investors are in the small minority. Most investors understand that change happens from within. By owing that security, you have a seat at the table in proxy votes and potentially in shareholder actions. If you give up that seat, you’ll have a much less of a chance to institute positive change at those companies.
Other exclusionary approaches to product creation have led to the availability of many bespoke “socially conscious” indices or niche theme funds, none of which has gathered enough assets to influence the investment industry.
Our approach to ESG-optimizing indices elevates the concept of ESG to a foundation principle for all stock selection. We see this as the pure application of ESG. This approach, which uses ESG as one of many factors to optimize by, lends itself to the creation of superior products that are investible, perform better than benchmarks, and are more sustainable.
As these products grow, stealing assets from market cap weighted benchmarks, investors will have power to institute significant change at the companies that our indices hold.