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03/19/2010

ASSET4 Helps Investors Navigate “The New Normal” Economy


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“The new normal” is a term used frequently by the sustainable investing community to define an emerging economic landscape characterized by greater regulation and investor scrutiny of corporate environmental, governance, and social behavior. This, in turn, is requiring corporations to internalize or address what were once the external costs of doing business. Those costs are showing up with increasing impact in the corporate bottom line. At a recent breakfast seminar hosted at NYSSA headquarters, representatives of ASSET4, a provider of environmental, social and governance (ESG) data and analytics, discussed the services the organization provides to corporations and investors who seek to compete in this “new normal” economy.

Founded in 2003, ASSET4 is a private Switzerland-based firm (Goldman Sachs and Bank of America Merrill Lynch hold investment stakes) with 160 full-time employees dedicated to ESG data gathering and analysis. Its clients include major banks, pension funds and global corporations. ASSET4’s ESG database covers 2,900 public companies in over 100 countries as well as 50 supranational organizations. It provides three years of historical data for 250 performance indicators and 900 individual data points for each organization it monitors. Its methodology includes not only the traditional negative screens but also positive, best in class assessments. Data is assembled from annual reports, company and NGO websites, stock exchange filings, corporate social responsibility reports and the news media. Companies are assessed along four “pillars”: economic (client and shareholder loyalty, and performance); environmental (resource use, emissions reduction and product innovation); social (employment quality, health and safety issues, training and development, diversity, human rights record, community engagement, and product responsibility); and corporate governance (board structure and function, compensation, and shareholder rights policies). ASSET4 has also developed models that report C02 emissions and energy use by company based on actual data or estimates when a company has failed to report. Clients can use the ASSET4 database to filter data based on their particular requirements. Equity investors, for example, can build a stock portfolio based on a customized rating system of selected ESG indicators.

In addition to services targeted to corporate fixed income and equity investors, ASSET4 recently introduced SovereignSupra, a service that allows fixed income investors in sovereign, local authority and supranational debt to screen for ESG factors. In partnership with the NYSE, ASSET4 also offers a service to NYSE-listed companies that allow them to undertake reviews of their ESG performance relative to their peers.

Still, the question that many mainstream investors continue to ask is “do ESG screens really create portfolios that outperform?” Or as a recent study undertaken by Quantitative Services Group using ASSET4 ESG scores asked: “Is there alpha in ESG signals?” To answer that question QSG formed portfolios of companies, reformed on a monthly basis, made up of securities that scored in the ASSET4 top quintile over a test period of June 30, 2003 to September 30, 2009. (A single ESG score by company was created by normalizing ASSET4 4 “pillar” scores—economic, environmental, social and governance—and combining them on an equal weighted basis.) This top quintile outperformed the Russell 1000 EW by over 300 bps on an annualized basis.

Ted Yarnell, general manager Americas for ASSET4, views the recent consolidation of the ESG analytics industry (Riskmetrics acquired Innovest in March, is reportedly in final stages of talks to acquire KLD Analytics, and INrate and Centre Info have just announced a merger) as part of the natural evolution of this emerging sector. When asked what sets ASSET4 apart from its competitors he noted that its business model is built on publicly available sources only, and does not use information solicited from companies through proprietary questionnaires or interviews. “Every piece of information and data is provided with full attribution so that clients can drill down and find the related source, author, publication, or URL. There are no black boxes,” Yarnell reports.

--Susan Arterian Chang reports on sustainable investing and the new economy from White Plains, New York, and Seal Beach, California.

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