For actively managed products, we apply an integration and screening strategy. In 2016, we further developed our proprietary in-house software solution (ESG Engine) and, therefore, the possibility to further integrate ESG aspects into investment decisions. To inform our investment, sales, and product specialists about new ESG Engine functionalities, we developed in-house training (mandatory for investment platform specialists, and voluntary for sales and product managers).
We have also purchased the Certified ESG Analyst training program from the European Federation of Financial Analysts Association (EFFAS), which is now mandatory for all analysts and portfolio managers across Equities, Fixed Income, and Multi-asset.
ESG Engine software
We have developed a proprietary in-house “FinTech” software solution to analyze, assess, and rank corporations, as well as sovereigns, on a wide range of ESG indicators. The approach is modern, applying algorithms and data management techniques to source, combine, and integrate ESG information from leading external ESG agencies. In 2016, we added a new data vendor, Trucost, a specialist for environmental sustainability data. By combining Trucost information with that from Sustainalytics, MSCI, ISS-Ethix, RepRisk, SIGWATCH, and oekom, our ESG analysis now draws from seven external ESG data specialists. We further supplement our data with information from relevant non-governmental organizations.
ESG rating methodology
In 2016, we released a new corporate ESG rating methodology, which allows us to identify ESG leaders and laggards within a peer group, as assessed by external specialists. While such a best-in-class approach is per se not new, we advanced it with our unique cross-vendor methodology, which seeks to deliver an objective 360-degree assessment. Our best-in-class approach considers hundreds of indicators covering resources and waste, climate change, green products, human capital, societal impact, product responsibility, business ethics, corporate governance, and public policies. A further ESG rating methodology was established for sovereigns in 2016, which puts an explicit weight on political and civil liberties, especially electoral processes and freedom of the press.
We are now even better equipped to deliver value to our clients: first by forging client-bespoke ESG solutions that follow dedicated guidelines; second by facilitating the integration of ESG information into our standard investment process. In 2016, ESG Engine reports were integrated into the wider Deutsche Asset Management investment platform. This empowers all portfolio and investment managers to assess risks and opportunities from ESG consistently and efficiently.
Controversial business activities
Portfolios are analyzed for whether their revenue may be perceived as controversial (e.g. defense) or exposed to risk sectors (e.g. coal). Furthermore, we screen for UN Global Compact compliance. While this serves ethical considerations (e.g. child labor), it also helps to monitor potential fallout from controversial business activities (e.g. market manipulation). Our analysis also includes an assessment of carbon risk using ESG vendor data.
The ESG Engine has been used to create dedicated ESG products across all liquid asset classes, particularly equities as well as corporate and sovereign fixed income, including high-yield and emerging markets. Key demand from institutional clients such as churches and pension funds can be met with active and passive products.
2016 showed an increased public interest in ESG. Morningstar and MSCI introduced ESG fund ratings that place ESG further into mainstream fund management. The ESG Engine was enhanced to deliver insight into the facts and drivers behind Morningstar’s fund assessments concerning ESG.