The importance of ESG considerations
At Global Evolution we recognize the importance of Environmental, Social and Governance (ESG) considerations for investors and advisors globally and continue to help our investors achieve their individual ESG goals.
A strong, integrated, and active ESG approach has become a prerequisite for investment managers to operate in today’s market, but certainly also an important selection criteria for many institutional investors.
Through our significant quantitative research effort, we have found that there is a strong business case for considering ESG dynamics as part of the investment process. ESG dynamics are highly correlated with returns – consequently bridging ESG with returns!
Global Evolution is an active signatory of UN Principles for Responsible Investment and UN Global Compact and continuously publishes research on the relevant subjects of ESG dynamics and investment process integration.
Global Evolution is also on the board of directors of the UNPRI Advisory Committee on Credit Ratings (ACCR) which actively takes ESG factors into account.
Global Evolution ESG Integration
Global Evolution has a strategic commitment to impact investment and ESG sustainability as an integrated part of our approach to investment. In terms of our ESG integration approach, we have incorporated ESG dynamics across our investment process through various proprietary quantitative econometric models.
For the full universe of emerging and frontier market countries, we construct proprietary ESG ratings, ESG-adjusted credit ratings, as well as statistical valuation signals for sovereign credit spreads and currencies based on ESG dynamics.
In all modesty, we consider ourselves as being at the forefront of ESG sovereign research and ESG sovereign investment integration. We continue to play an active role in the public domain through our ESG research agenda and our close collaboration with the World Bank, the UN, and other relevant stakeholders.
Global Evolution maintains proprietary ESG ratings for all emerging and frontier market countries across a set of more than 100 E, S and G indicators. Our ESG ratings are calculated in our ESG-simulator which is integrated into our proprietary IT systems and contributes valuable information to the investment process.
The ESG Ratings are optimized through simulations of the several variables and weightings and only includes indicators with substantial influence on the sustainable economic and socio-economic development of countries. In that context, the ESG dynamics are linked to long-term sovereign investments through sustainable development.
The ESG Ratings serve to inform our investment process and as ongoing input to our quantitative valuation and rating models.
Negative Screening Model
As part of the sovereign monitoring we operate with a negative screening model that provides a negative watch list for countries due to reasons pertaining to unsustainable levels of governance developments.
Key indicators are used as benchmarks, such as: political rights, civil liberties, democracy, corruption, failed state indicators, and whether the international financial institutions are willing to engage with a government. Deteriorations in such indicators may lead to exclusion from the investable universe of countries.
We prefer to use the carrot rather than the stick approach to encourage a government to act in a manner which we believe will be beneficial for the majority of its population. However, in the most extreme circumstances of government malfunction, we would not favor a strategy of positive engagement.
Valuation and Rating Model
By integrating fundamental macroeconomic, financial and ESG factors into our valuation models, Global Evolution estimates signals for valuations of sovereign credit spreads and currencies. The models are based on panel regression econometrics across the relevant emerging and frontier markets universe and then compares the fundamental fair value of the sovereign credit spreads and currencies with actual market levels. The models simulates over/under/fair valuation signals as well as their statistical significance to inform the investment process as leading indicators for credit spread and currency change.
The Rating Model estimates high-frequency credit ratings, and takes advantage of the dynamics of the fundamentals estimated in the Valuation Model, including macroeconomic, financial and ESG factors. Such high-frequency dynamics in fundamentals are applied to adjust the official and low-frequency credit ratings provided by e.g. S&P and Moody’s, and estimate ratings for non-rated countries. Such a proprietary methodology provides a monthly leading indicator for fundamentally deserved credit rating upgrades/downgrades that are not captured in the official credit ratings, and consequently provides the investment process with timely information on sovereign debt valuations.