AI Used To Analyse ESG Data
Hiro Mizuno, executive managing director and chief investment officer of Japan’s $1.4 (€1.2) trillion Government Pension Investment Fund, the world’s largest investor, said artificial intelligence can be used to help integrate environmental, social and governance data into the investment process.
Mizuno made the keynote presentation at the conference on Exploring Stewardship and the Transition to a Sustainable Economy Conference at the London Stock Exchange last week. He said: “AI can be used to enhance human wisdom.”
In April this year GPIF and the World Bank Group published a report on incorporating ESG into fixed income investment strategies as part of a broader collaboration to promote strategies for including ESG criteria in investment decisions across different asset classes, not just equities. The report said technology is helping tackle the paucity of ESG data by allowing investors to go beyond using standard, self-reported corporate data to incorporate ‘big data’ and new information sources, such as satellite, reduce costs and by providing more real-time data.
“Much more basic environmental and other data are available now than only one or two decades ago,” said the report. “Combined with artificial intelligence and machine learning techniques, real-time evidence for investors is becoming more obtainable.”
The study gave the examples of data providers, such as True Value Labs and Arabesque, providing ‘sustainable quants’ based services using big data and machine learning tools.
“MSCI and other data providers are noting that an increasing number of their clients are quants,” added the study. “Already, a number of investors, including pension funds such APG and Pension Danmark, are testing and implementing artificial intelligence/robotics for certain processes.”
In November last year GPIF also chose Sony Computer Science Laboratories as a partner to study the impact of AI on asset management, and the pension fund is running another AI research project with Accenture.
BNP Paribas Securities Services said in a survey in May last year that 84% of the Asia Pacific-based institutional investors incorporate ESG into their investment decision making, more than in Europe and the US. In Europe 82% institutional investors incorporate ESG and only 70% in North America.
Madhu Gayer, BNP Paribas Securities Services’ head of investment analytics for the APAC region, said in a statement : “In the last couple of years, we have seen some of Japan’s largest institutional investors, including GPIF which is the biggest pension fund in the world, incorporating ESG into their investment practices. This has a major trickle-down effect on the investment value chain, from asset managers to providers of data.”
The lack of robust data was cited as the most significant barrier to further incorporation of ESG by 61% of institutional investors.
“This shortage of data to support ESG investments has led some senior management ranks to be more sceptical, which has in turn limited adoption across the Asia Pacific region, and globally more generally,” said Gayer, “However, smart data, artificial intelligence and ESG specialists will play a crucial role in helping to break down these barriers in the next few years.”
Maurice Versaevel, investment strategist at PGGM, said at the forum that the Dutch asset manager has developed an AI program to incorporate ESG into its investment process. “We use AI to analyse publicly available information and calculate ESG compliance,” he said.
Last year PGGM invested €13.7bn for its clients in solutions for climate, health care, food and water, more than four times the €3.3bn invested in 2016. PGGM and fellow Dutch investor APG also developed a methodology last year to identify investment opportunities linked to 13 of the 17 UN Sustainable Development Goals.
In February this year APG announced it was taking over the data analytics activities for sustainable investing from Deloitte Nederland. APG said in a statement: “The thirteen employees will be working for APG in an independent business unit. The takeover will significantly accelerate APG’s use of artificial intelligence and big data for sustainable and responsible investing.
PGGM is purely an active manager but in contrast, 80% of GPIF’s assets are managed passively. The Japanese pension fund currently invests in three ESG indexes – FTSE Blossom Japan, MSCI Japan ESG Select Leaders and MSCI Japan Empowering Women, which focuses on gender diversity.
“We will triple our ESG investment from $10bn,” Mizuno added.
He continued that one of the funds’ priorities is to make passive managers exercise GPIF’s voting rights. “If you do not satisfy us then you are out,” said Mizuno. “But we are also happy to increase fees if you have a compelling business model.”
Mizuno said GPIF is also happy to pay more to active managers who perform. “If you generate alpha, we will pay, which is very simple. We will also offer multi-year contracts as in private equity,” he added.
Prior to joining GPIF in 2015, Mizuno was a partner of London- based private equity firm Coller Capital. He previously worked at Sumitomo Trust & Banking in Japan, Silicon Valley and New York.
Without a solid policy, new technology can alienate clients and hurt the bottom line.
North America is projected to be the largest market through 2023.
Oak HC/FT led the funding along with contributions from seed investors.
Should firms build or buy the necessary technology?
Initial focus has been fixed income in the front office.