October 2020 - Carbon accountability and Sustainable Standards - Systematic Fund Manager's Comments

Launched in July 2020, in the middle of the pandemic, the RAM Stable Climate Global Equities Strategy has been behaving well (class Ip$-Net) outperforming the MSCI World TRN$ Index (The portfolio is actively managed on a systematic basis without using a reference benchmark. Comparison is for illustration purposes only), posting a return of +3.27 (Past performance is not an indicator of future returns). In term of sustainability our portfolio has been in line with our objectives in term of ESG selection and total Carbon Emission. Our portfolio did generate 331 TCO2 (scope 1 and 2) over the period vs around 1000 TCO2 for the MSCI World Index (considering equivalent AUM). As expected, we did do our quarterly exercise in October to offset the portfolio CO2 emissions selecting 2 CDM projects with interesting additionality and co-benefits:

1. Biomass based power project by Harinagar Sugar Mills Ltd : the project based in Bihar/India aims to generate electricity by the combustion of bagasse ( a residue of sugar cane) which is a carbon neutral fuel . In addition to reduction of GHG emission, this biomass project provides new opportunities for industries and economic activities in the area. (read more here)
2. Methane recovery from waste water generated from wheat straw wash at Paper manufacturing unit of Shreyans Industries Limited: The project based in Punjab/India consists in installations able to capture methane and burning it for the generation of boilers with a paper manufacturing unit. It offers number of co-benefits in term of environment, jobs and welfare in the area. (read more here)

Performance review and positioning

In terms of performance since launch on 09 July 2020, the Strategy benefited highly from a good selection in Communication services in US. We also benefited strongly from our underweight in highly emitting activities in the Energy sectors and within Information Technology. Initially, we could have believed that the pandemic investors would have turn away from ESG considerations given the worrying economic perspective. But we continue to see sustainable issues making the headlines.
Our current largest underweight, the Technology sector have been struggling more than usual lately on their sustainability ratings despite their stellar performance this year. Because of their size it is more and more difficult for them to control their supply chain, often situated in countries less regarding in term of worker conditions (see scatter plot fig.1]. Furthermore, the impact on our societies of the data collection by the largest tech firms and the personal data oligopoly that profiles itself on the horizon will probably at some point raise more questions about the Social impact these firms have, as well as their Governance.

[figure 1 – Do IT companies have enough process in place to manage ESG risk in their supply chains? ]

Note: Scale from 1 to 10, the higher the Supply Chain Risk score is, more a company’s business is vulnerable to the ESG risk of its supply chain. Higher the Supply Chain Management score is, more a company’s organization is able to manage ESG risk and opportunities.
Source: RAM AI, MSCI ESG data on the MSCI World Index Constituent as of 30/09/2020

Augmented data integration – Using news flow with Natural Language Processes

These observations have been accelerating over the last months. Nevertheless, observing change through the prism of ESG scores of companies remains challenging as downgrades/upgrades are not as frequent as within the realm of traditional financial information. But looking at more dynamic data such as unstructured data coming from news flows, it helps to add one more dimension to the paradigm change we are observing. Screening the media and news over the last 3 months, we can see increasing concern on ESG related issues within the technology sector. Thanks to Natural Language Processing, we are able to interpret news flows quantitatively, assigning a sentiment factor to it. Over the last quarter we observed a violent shift in ESG sentiment in the Technology sector, while the overall market sentiment has been quite stable.

[figure 2 – Increase concern in the IT sector sustainability?]

Note: We aggregate the sentiment factor of each company mentioned in our new flows screend, aggregating the seitment factor by sector. On a scale from -1 to +1, a negative sentiment leads to potential controversies of the company, closer to 1 the sentiment factor is, more positive is the news.
Source: RAM AI as of 20/10/2020

[Figure 3 – Word Cloud in the Electronic Technology Sector looking at news flows in Q3 2020]

The Electronic Technology sector seems to be the most impacted by recent news flows when looking at ESG controversies. Number of tech firms are strongly impacted by news on antritrust , workforce as well as energy issues (cf figure 3). While the frontpages of the media have only focused mostly on a couple of IT sector leaders, the relevance of these questions however is valid for a great number of companies. In our view these issues are highly scrutinized by politics worldwide and the volatility of the political agenda will be reflected also in the market in the coming months.

Note: We show in this word cloud main ESG topics identify by our NLP tool that screen news flow on Companies globally.
Source: RAM AI as of 20/10/2020

ESG investing and flows have tended to benefit large companies in recent years, the current dynamic of ESG improvement in the small-cap space pleads for more diversified and active All-Cap sustainable investing. After a few years of small caps underperforming larger caps, it is probably the right time for investors to look deeper into the opportunities in this segment of the market.