Alpha-Centric ESG Research

Kyle Rudden

Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:<ul>
<li>Affects firms doing business with U.K. asset managers/owners not just the managers/owners.</li>
<li>Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.</li>
<li>Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).</li>
</ul>This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and is not) on the signatory list.

Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:
Affects firms doing business with U.K. asset managers/owners not just the managers/owners.
Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.
Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).
This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and is not) on the signatory list.

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

We see those big numbers in the press, almost daily it seems. About ESG assets under management (AUM) reaching US$40 trillion, expected to hit US$53 trillion by 2025. Or about quarterly ESG fund flows nearing US$100 billion, and the seismic shift in ESG AUM to passively-managed funds.Recent growth in SRI (sustainable and responsible investing) and ESG (Environmental, Social, and Governance) assets and investment products would not be possible without the growing ecosystem of index providers, and the SRI/ESG indices and benchmarks that they create.The ongoing boom in SRI/ESG indexing, which shows no signs of slowing, creates new opportunies for investors – and I do not mean investing in indexed mutual funds or ETFs. Too obvious, and too retail. I am referring to emergent opportunities associated with SRI/ESG index arbitrage.Index rebalancing/reconstitution events often create windows of abnormal returns for constituents being re-weighted, added, or dropped. That much is obvious, and the effects of broad market index changes are well-known. For SRI/ESG indices, this is uncharted territory with huge potential.This Smartkarma Original looks at the evolving SRI/ESG indexing landscape, and more importantly the emergent investing (e.g., stocks of listed indexers) and trading (e.g., arbitraging index changes) strategies arising from this global boom in SRI/ESG indices... from an Original perspective.<h2>WHAT'S ORIGINAL?</h2>Typically, discussions about SRI/ESG indices focus on their performance and in the context of that age-old "ESG-Alpha" debate – i.e., whether incorporating ESG factors into the investment process is worth the effort. To be clear, that is an important debate to have (and win). However, this report takes a different angle on SRI/ESG indices by focusing on investing and trading and strategies that capitalise on the boom in SRI/ESG indices. Theory (and a little speculation) backed by analysis.

We see those big numbers in the press, almost daily it seems. About ESG assets under management (AUM) reaching US$40 trillion, expected to hit US$53 trillion by 2025. Or about quarterly ESG fund flows nearing US$100 billion, and the seismic shift in ESG AUM to passively-managed funds.Recent growth in SRI (sustainable and responsible investing) and ESG (Environmental, Social, and Governance) assets and investment products would not be possible without the growing ecosystem of index providers, and the SRI/ESG indices and benchmarks that they create.The ongoing boom in SRI/ESG indexing, which shows no signs of slowing, creates new opportunies for investors – and I do not mean investing in indexed mutual funds or ETFs. Too obvious, and too retail. I am referring to emergent opportunities associated with SRI/ESG index arbitrage.Index rebalancing/reconstitution events often create windows of abnormal returns for constituents being re-weighted, added, or dropped. That much is obvious, and the effects of broad market index changes are well-known. For SRI/ESG indices, this is uncharted territory with huge potential.This Smartkarma Original looks at the evolving SRI/ESG indexing landscape, and more importantly the emergent investing (e.g., stocks of listed indexers) and trading (e.g., arbitraging index changes) strategies arising from this global boom in SRI/ESG indices... from an Original perspective.WHAT'S ORIGINAL?Typically, discussions about SRI/ESG indices focus on their performance and in the context of that age-old "ESG-Alpha" debate – i.e., whether incorporating ESG factors into the investment process is worth the effort. To be clear, that is an important debate to have (and win). However, this report takes a different angle on SRI/ESG indices by focusing on investing and trading and strategies that capitalise on the boom in SRI/ESG indices. Theory (and a little speculation) backed by analysis.

Sustainability and ESG Indices: A Booming Ecosystem and New Investing and Trading Opportunities

The collective carbon footprint of global freight transportation and logistics is utterly massive, and growing. Freight and logistics accounts for 10-15% of the world's greenhouse gas (GHG) emissions, or 3.4-5.1 billion tonnes of carbon dioxide (CO2) per year of the world's 34 billion-tonne total. Current GHG mitigation and decarbonisation policies will be enough to fully offset GHG emissions from expected growth in freight transportation and logistics. Projections suggest a 60-80% increase in emissions by 2050, when a decrease of 55-80% is needed to meet the Paris Agreement goals.Climate impacts of trade growth are compounded by how it will shift freight movement from North Atlantic to Indian Ocean corridors, increasing average distances 12%. More critical is the local leg; 10% by tonne-kilometres but 30% of GHGs (inland modes like trucking are more GHG-intensive).On a company level, carbon footprint – present and future – depends on several things. Aside from macro issues like regional fuel mix and climate policies, two big factors are: 1) a company's specific function (e.g., freight trains vs. logistics software), and 2) its decarbonisation initiatives.The collective carbon footprint is a major ESG issue but we should not apply a broad-brush. Freight and logistics companies are vital to the economy and deliver life-critical goods like medication and food. Moreover, companies like <a href="https://www.smartkarma.com/entities/jd-logistics" target="_blank" data-smartkarma-citation="entities:31500:1" rel="noopener">JD Logistics (JDL HK)</a> – are leading a "greening" of supply chains.This is an important ESG issue to watch, but not an "exclusionary screen" by any means.

The collective carbon footprint of global freight transportation and logistics is utterly massive, and growing. Freight and logistics accounts for 10-15% of the world's greenhouse gas (GHG) emissions, or 3.4-5.1 billion tonnes of carbon dioxide (CO2) per year of the world's 34 billion-tonne total. Current GHG mitigation and decarbonisation policies will be enough to fully offset GHG emissions from expected growth in freight transportation and logistics. Projections suggest a 60-80% increase in emissions by 2050, when a decrease of 55-80% is needed to meet the Paris Agreement goals.Climate impacts of trade growth are compounded by how it will shift freight movement from North Atlantic to Indian Ocean corridors, increasing average distances 12%. More critical is the local leg; 10% by tonne-kilometres but 30% of GHGs (inland modes like trucking are more GHG-intensive).On a company level, carbon footprint – present and future – depends on several things. Aside from macro issues like regional fuel mix and climate policies, two big factors are: 1) a company's specific function (e.g., freight trains vs. logistics software), and 2) its decarbonisation initiatives.The collective carbon footprint is a major ESG issue but we should not apply a broad-brush. Freight and logistics companies are vital to the economy and deliver life-critical goods like medication and food. Moreover, companies like JD Logistics (JDL HK) – are leading a "greening" of supply chains.This is an important ESG issue to watch, but not an "exclusionary screen" by any means.

Carbon Footprint of Freight Transportation and Logistics and Other ESG Issues

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

In our latest Smartkarma Webinar, we welcome Insight Provider <a href="https://www.smartkarma.com/profiles/kyle-rudden" target="_blank" data-smartkarma-citation="accounts:4495" rel="noopener">Kyle Rudden</a>,  who will discuss his recent Insight, <a href="https://www.smartkarma.com/insights/sustainability-esg-frameworks-overview" target="_blank" data-smartkarma-citation="insights:40728" rel="noopener">Sustainability/ESG Frameworks: Overview</a> and subsequent Insights. Kyle will give an overview of the sustainability framework ecosystem, starting with the “Big Three”:
<ol>
<li>UN Sustainable Development Goals (SDGs), a framework for society-level sustainability</li>
<li>Global Reporting Initiative (GRI), a company-level framework for a very broad audience</li>
<li>Sustainability Accounting Standards Board (SASB), company-level but investor-focused</li>
</ol>
<h3>The webinar was hosted on Friday, 7/August/2020, 5.00pm SGT/HKT.</h3>
Watch the session here:
<iframe src="https://www.youtube.com/embed/Ui51Ypx9oVc" width="560" height="315" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe>

<a href="https://www.smartkarma.com/profiles/kyle-rudden" target="_blank" data-smartkarma-citation="accounts:4495" rel="noopener">Kyle Rudden</a> is an ESG (Environmental, Social, Governance) analyst with an alpha-centric approach to ESG research. After all, ESG investing is, first and foremost, investing. "Alpha-centric" does not mean apathetic, however. Quite the contrary. Kyle believes global sustainability – i.e., environmental stewardship, social equality, and economic prosperity – is imperative, and private-sector capital is its cornerstone. Private-sector capital still has fiduciary responsibilities. Profitability is necessary for sustained impact. The Triple Bottom Line. People, Planet, AND Profit.

In our latest Smartkarma Webinar, we welcome Insight Provider Kyle Rudden,  who will discuss his recent Insight, Sustainability/ESG Frameworks: Overview and subsequent Insights. Kyle will give an overview of the sustainability framework ecosystem, starting with the “Big Three”:

UN Sustainable Development Goals (SDGs), a framework for society-level sustainability
Global Reporting Initiative (GRI), a company-level framework for a very broad audience
Sustainability Accounting Standards Board (SASB), company-level but investor-focused

The webinar was hosted on Friday, 7/August/2020, 5.00pm SGT/HKT.
Watch the session here:


Kyle Rudden is an ESG (Environmental, Social, Governance) analyst with an alpha-centric approach to ESG research. After all, ESG investing is, first and foremost, investing. "Alpha-centric" does not mean apathetic, however. Quite the contrary. Kyle believes global sustainability – i.e., environmental stewardship, social equality, and economic prosperity – is imperative, and private-sector capital is its cornerstone. Private-sector capital still has fiduciary responsibilities. Profitability is necessary for sustained impact. The Triple Bottom Line. People, Planet, AND Profit.

Smartkarma Webinar | Global Sustainability & ESG Frameworks: What Matters Most

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Thematic (Sector/Industry)

<ul>
<li>In this report, we look at how global exchanges are positioning themselves to diversify revenue streams beyond the traditional</li>
<li>Select exchanges in developed markets are actively focusing in on demand for exchanges’ proprietary data, a few are enhancing their data capabilities through M&amp;A</li>
<li>Emerging market exchanges are at a different stage of development, with more potential for new listings and growth in trading fees, but we believe that they still need to prepare for life beyond the traditional revenue model</li>
<li>In LatAm, B3 stands out as a beneficiary of the recent sharp cuts in domestic benchmark rates and rise in trading activity, but we believe that much of this is already reflected in B3’s recent share price re-rating, and that B3 is at risk of a trading downturn, with it yet to develop its data and related services revenue buffer; we prefer smaller cap Bolsa Mexicana
</li>
<li>In Asia, we like SGX which derives a higher share of revenues from data services than HK Exchange, and we also believe that SGX is less exposed than HKEx to prospective EBITDA margin erosion; Bursa Malaysia valuations seem stretched, in our view</li>
<li>In developed market exchanges, LSE Group is in the spotlight for its planned acquisition of Refinitiv, and its already high revenue share of data services, along with ICE and TMX of Canada; we highlight ICE for its attractive valuation, healthy EBITDA margin and its high share of revenue from data services</li>
<li>Risks to our negative view on B3 include continued high levels of trading in equities, derivatives supported by further central bank rate cuts and better-than-expected opex control; risks to our positive views on Bolsa Mexicana, ICE include weaker than expected trading activity and fewer than expected new listings</li>
</ul>


In this report, we look at how global exchanges are positioning themselves to diversify revenue streams beyond the traditional
Select exchanges in developed markets are actively focusing in on demand for exchanges’ proprietary data, a few are enhancing their data capabilities through M&amp;A
Emerging market exchanges are at a different stage of development, with more potential for new listings and growth in trading fees, but we believe that they still need to prepare for life beyond the traditional revenue model
In LatAm, B3 stands out as a beneficiary of the recent sharp cuts in domestic benchmark rates and rise in trading activity, but we believe that much of this is already reflected in B3’s recent share price re-rating, and that B3 is at risk of a trading downturn, with it yet to develop its data and related services revenue buffer; we prefer smaller cap Bolsa Mexicana

In Asia, we like SGX which derives a higher share of revenues from data services than HK Exchange, and we also believe that SGX is less exposed than HKEx to prospective EBITDA margin erosion; Bursa Malaysia valuations seem stretched, in our view
In developed market exchanges, LSE Group is in the spotlight for its planned acquisition of Refinitiv, and its already high revenue share of data services, along with ICE and TMX of Canada; we highlight ICE for its attractive valuation, healthy EBITDA margin and its high share of revenue from data services
Risks to our negative view on B3 include continued high levels of trading in equities, derivatives supported by further central bank rate cuts and better-than-expected opex control; risks to our positive views on Bolsa Mexicana, ICE include weaker than expected trading activity and fewer than expected new listings


United Kingdom

London Stock Exchange Group plc (LSEG) is a global financial markets infrastructure and data provider. The group offers services in data, analytics, capital formation, trade execution, clearing, and risk management. It is headquartered in London, England, and was created in October 2007 through the merger of London Stock Exchange and Borsa Italiana.

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London Stock Exchange Group (LSEG LN)

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

Telegraph from European front in global war on greenwashing. U.K. names stewardship victors ("not greenwashers"). Many notable casualties. Anti...

Kyle Rudden

Sustainability and ESG Indices: A Booming Ecosystem and New Investing and Trading Opportunities

Index rebalancing and reconstitution often creates a window of abnormal returns (and opportunity). For broad market indices, these effects are well...

Kyle Rudden

Carbon Footprint of Freight Transportation and Logistics and Other ESG Issues

The carbon footprint of global freight and logistics is large, growing, and a source of ESG risk for investors. Fortunately, firms like JD...

Kyle Rudden

Smartkarma Webinar | Global Sustainability & ESG Frameworks: What Matters Most

In our latest Smartkarma Webinar, we welcome Insight Provider Kyle Rudden, who will discuss his recent Insight, Sustainability/ESG Frameworks:...

Smartkarma Research

Exchanges: Life Beyond Trading

In this report, we look at how global exchanges are positioning themselves to diversify revenue streams beyond the traditional Select exchanges in...

Victor Galliano

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