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The next step in ESG Integration - Refinitiv
- 1. The next stepin ESG Integration The Financial Community has arrived to Barnabas Acs, Ph.D. barnabas.acs@refinitiv.com London, 5th June 2019
- 2. 2 Global Drivers TowardsESG Kiernan (2007) Global Footprint • Globally there are now $22.89 trillion of assets being professionally managed under responsible investment strategies, ~ 26% Global AUM • Sustainable investing grew rapidly: 25% since 2014, 70% since 2012. Prospects – Strong further growth owing to: 1. Transfer of wealth – 10% of Global AUM will change hands in the next 5 years – 67% of Millennials - investments express socio-political views – 90% of Millennials - realize competitive returns & promote positive social & environmental outcomes 2. Increasing Regulation – Requires companies and investors to consider ESG factors when making investment decisions. 3. Data Availability - Companies publish more sustainability reports, which is in turn published by data providers – S&P500 companies reporting on ESG 20% in 2011, 81% in 2015 4. Standardization & consolidation of investment practices and market participants 5. Risk Mitigation & Alpha Generation ESG presented through the Kiernan Iceberg Model As we move deeper and deeper into the era of knowledge‐value and intangibles, conventional financial statements are capturing less and less of a company’s true value, investment risk and competitive potential – on average less than 15%, in case of Microsoft for example it is less than 1%! Environmental, Social and Governance proposes a sort of an iceberg approach to uncover what lies below the see level (Kiernan, 2003). ESG represents one of the most impactful alternative data published by the company itself and reinforced / challenged by the flow of news / controversies. Refinitiv - The Next Step in ESG Integration
- 3. 3 Stakeholders in ESG PrimaryStakeholders Secondary Stakeholders – providers of services: • Specialized ESG Data & Research Providers • (Sell-side) Research Providers • Investment Vehicle Providers (Sell-side Banks and ETF Providers) • Index Providers • Credit Rating Agencies & Secondary Opinion Providers (Green Bonds) Refinitiv - The Next Step in ESG Integration
- 4. 4 ESG Data Industry– Place of Refinitiv At data generation – corporate level: Jurisdictions/Frameworks | Production vs Collection | Industry Specifics | Corporate Interpretation At data capture – data collection, interpretation, presentation: Timeliness & Frequency | Transparency | Qualitative vs Quantitative ChallengesTypesofSolutionsRep. Collecting ESG data has numerous challenges resulting in 3 main types of solutions to data provision 1) Outside-IN • Public’s perception of a company’s performance • Numerous news and social media sources • AI powered ”sentiment scoring” Main types of data provision ⊕ Frequently updating ⊕ PiT time series & overlay ⊖ Relative - compared to previous state ⊖ Obscure methodology ⊖ Limited number of indicators 3) Inside-OUT - Researched Based • Company’s on view collected, interpreted and transformed into ESG research • Publicly available information, generated by the company + news & social media for controversies • Data based, subjective judgement on companies performance ⊕ Infrequent, irregular updates ⊕ Deep Analysis on performance ⊖ Time series limited to few aggregations ⊖ Obscure methodology ⊖ Limited number of indicators 2) Inside-OUT - Rules Based • Company’s on view collected, interpreted and transformed into ESG Scoring/Ranking • Publicly available information, generated by the company + news controversies • Data based, rules based rating of companies performance ⊕ Regular updates » time series ⊕ Transparent methodology ⊕ Customizable, ratings to individual indicator level ⊖ Doesn’t provide expert advise ⊖ Work with data might be cumbersome Refinitiv - The Next Step in ESG Integration
- 5. 5 Thomson Reuters »Refinitiv • Thomson Reuters • Financial & Risk • Reuters News • Tax & Accounting • Legal Refinitiv Over 40,000 customers around the globe 400,000+ end users in more than 190 countries 5,000+ investment firms and hedge funds supported worldwide 10 billion bytes of real-time pricing data distributed every day Up to 7 million price updates distributed per second to the financial markets Largest global professional FX community, with over 1,700 institutional clients and 160 providers $400 billion+ in FX trading per day and unparalleled access to deep liquidity $250 billion in bond trading supported daily 175k+ World-Check profiles created/updated monthly Auctions: $10 billion+ allocated in June 2018 across 16 Central Banks and Tier 1 corporates 400,000+ KYC records built, published and maintained continuously and 1.25 million actively managed legal entity profiles with a database of 7 million legal entities >2 million news stories per year Venues and Transactions Risk and Compliance Data, Analytics and Workflow >10,000 free float market cap weighted indices for 51 countries Refinitiv - The Next Step in ESG Integration
- 6. 6 Refinitiv ESG –Unique Selling Points Universe of 7,000+ global companies Coverage of major global and regional indices including MSCI World, STOXX 600, Bovespa, FTSE 250, ASX 300, Russell 1000, R 3000, DAX, SMI and MSCI Emerging Market Index. 7000+ Companies 400+ Metrics Transparency & Audibility Scoring Customisation Pillars, Categories, Controversies Green Bonds League Tables History Back to 2002 Integrated with Fundamentals Eikon – Tailored Analytics Multiple Delivery Channels Rigorous Quality Checks Wealth Management Use Case Integrated with Quant Unique in the Market RawDataRatingX-AssetDelivery 400+ ESG metrics 1.2M officers, directors 513,000 individual fixed income securities 7,000+ global companies Refinitiv - The Next Step in ESG Integration
- 7. 7 ESG Scoring Architecture– Integrating Report & Conduct OF THE 400+ ESG METRICS, 178 COMPARABLE MEASURES ARE USED IN THE ESG SCORING MORE THAN 400 DATA POINTS, RATIOS AND ANALYTICS AGGREGATED ESG MEASURES ESG METRICS ENVIRONMENTAL RESOURCE USE EMISSIONS INNOVATION SOCIAL WORKFORCE HUMAN RIGHTS COMMUNITY PRODUCT RESPONSIBILITY GOVERNANCE MANAGEMENT SHAREHOLDERS CSR STRATEGY ESG CONTROVERSY CONTROVERSIES ACROSS ALL 10 CATEGORIES ARE AGGREGATED IN ONE CATEGORY SCORE ESG SCORE ESG COMBINED SCORE ESG CONTROVERSY SCORE CATEGORIES ESG Controversies Score is calculated based on 23 ESG controversy topics • Same percentile ranking formula as ESG scores based on the number of controversy news • Benchmarked on industry group # Category Controversy Title 1 Community Anti-Competition Controversy 2 Community Business Ethics Controversies 3 Community Intellectual Property Controversies 4 Community Critical Countries Controversies 5 Community Public Health Controversies 6 Community Tax Fraud Controversies 7 Human Rights Child Labor Controversies 8 Human Rights Human Rights Controversies 9 Product Res. Consumer Controversies 10 Product Res. Controversies Customer Health & Safety 11 Product Res. Controversies Privacy 12 Product Res. Controversies Product Access 13 Product Res. Controversies Responsible Marketing 14 Product Res. Controversies Responsible R&D 15 Workforce Diversity and Opportunity Controversies 16 Workforce Employees Health & Safety Controversies 17 Workforce Wages Working Condition Controversies 18 Workforce Management Departures 19 Management Mgt Compensation Controversies 20 Shareholders Accounting Controversies 21 Shareholders Insider Dealings Controversies 22 Shareholders Shareholder Rights Controversies 23 Resource Use Environmental Controversies Refinitiv - The Next Step in ESG Integration
- 8. 8 Transparent Methodology –ESG & Resource Use Percentile Rank scoring methodology • Benchmarked to TRBC Industry Groups (Country of Domicile in case of Governance) • Score equally weighted sum of all the metrics scores used to create it If Boolean: Yes=1, No=0.5, N/A=0 Metrics - Resource Use Category Dt Pol Dv Environment Mgt Team B + 0.5 Policy Water Efficiency B + 0.5 Policy Energy Efficiency B + 0.5 Policy Sustainable Packaging B + 0.5 Policy Environmental Supply Chain B + 0.5 Targets Water Efficiency B + Targets Energy Efficiency B + Environmental Materials Sourcing B + 0.5 Toxic Chemicals Reduction B + 0.5 Cement Energy Use F - Green Buildings B + 0.5 Water Recycled F + Environmental Supply Chain Mgt. B + 0.5 Env. Supply Chain Partnership Termination B + 0.5 Land Environmental Impact Reduction B + 0.5 Environmental Supply Chain Monitoring B + Energy Use F (I) - Renewable Energy Use F (I) + Water Use F (I) - Pillar Category # Ind. W % PW % E Resource Use 19 11% 34%Emissions 22 12% Innovation 20 11% S Workforce 29 16% 36%Human Rights 8 4.5% Community 14 8% Product Res. 12 7% G Management 34 19% 30%Shareholders 12 7% CSR Strategy 8 4.5% Pillar weights Links to details: Scoring Methodology Document Refinitiv ESG Solutions Refinitiv - The Next Step in ESG Integration Scores into Ratings Score Range Grade 91.66 - 100.00 A+ 83.33 - 91.66 A 75.00 - 83.33 A- 66.66 - 75.00 B+ 58.33 - 66.66 B 50.00 - 58.33 B- 41.66 - 50.00 C+ 33.33 - 41.66 C 25.00 - 33.33 C- 16.66 - 25.00 D+ 8.33 - 16.66 D 0.00 - 8.33 D-
- 9. 9 Refinitiv -The Next Step in ESG Integration ESG – Questions and Answers ESG Forward looking? • Additional Information • Trinity of sincerity – policy, target, management Relative or Absolute? • Industry Groups & Countries - handle ”best” accordingly • Trinity of sincerity – policy, target, management • Raw and standardized data are key for informed comparison Standards to follow? • Numerous standards - GRI, SASB, TCFD, SDG/SDI – and targeted themes Worth non- reporting? • Qualitative measures – negative drag • Quantitative measures – no negative drag Holistic or granular? • Holistic – easy to interpret, insight is lost, green washing risks • Granular – enables addressing a theme How objective? • Relatively manual, evaluations driven • Corporate direct reporting
- 10. 10 Refinitiv ESG -Proposition Pillars Data, Analytics and Standards Products, Tools and Workflows Partnerships and Innovation Thought Leadership Trusted source of standardized, transparent and relevant ESG information • A global team of 150+ analysis research of public companies (covering 70% of global market cap) • Continuously enhancing the data framework and adding more measures to offer unique and relevant content to our clients • Data overlaid with insightful, innovative proprietary or partner analytics • Collaboration with stakeholders in the investment value chain to improve transparency and establish disclosure standards Smarter machines that make humans smarter – multiple ways to access data & analytics: • Desktop: ESG data, scores and custom analytics on Eikon and Datastream to support thematic ESG investment strategies and integrated workflows • ESG on the Cloud / Elektron Data Platform - enhanced research delivery system, which supports access to ESG via API, and historical content delivery via FTP. • Integrated into quantitative workflow via the QA brand – QAD, QAC, QAP Open platform strategy - continuously enhance the ESG offering via partnerships: • Indices and benchmarks: the first sustainability index developed by a multilateral development bank, IADB for LatAm – Index Americas; Diversity & Inclusion • Exchanges: to create ESG benchmarks • App Studio: TruValue Labs for real- time, big data ESG insights • Research: onboard ESG research reports (like Regnan) to complement Inside-OUT rules based approach Diverse thought leadership and collaboration agenda to accelerate adoption of ESG: • Global 250 GHG Emitters • Top 100 Global Energy Leaders – collaboration with TR Labs and IPGs • Refinitiv Sustainable Leadership and public pledges • Collaboration with WEF for the development of the Sustainable Leadership Monitor • Member of the Technical Expert Group on Sustainable Finance Refinitiv - The Next Step in ESG Integration
- 11. 11 Refinitiv -The Next Step in ESG Integration ESG Integrated – Sustainable Leadership Monitor
- 12. 12 Summarizing Refinitiv enables tailoredintegration of ESG into the research, investment vehicle creation, and investment management processes through • audible, standardized data across all Environmental, Social and Governance pillars, • transparent and customizable rating mechanism, • regularly updating controversies • wide range of concorded historic and forward looking fundamental and pricing data • value-add index calculation services supporting thematic investments Refinitiv – The next step in ESG Integration Refinitiv - The Next Step in ESG Integration
- 13. Thank you! Barnabas Acs,Ph.D. Market Development Manager, EMEA barnabas.acs@refinitiv.com London, 5th June 2019
- 14. Appendix I. ESG RegulatoryFrameworks
- 15. 15 Evolving Regulatory Frameworkof ESG Refinitiv - The Next Step in ESG Integration SASB Sustainability Accounting Standards Board (2011) CDP Carbon Disclosure Project (2000) SEC FASB / US GAAP (1934) GRI Global Reporting Initiative (1997) IASB IFRS (1973) UN SDGs Sustainable Development Goals (2015) TCFD Task Force on Climate- Related Financial Disclosures (2015) • Most-widely referenced • Outside regular financial statements • Compliance with EU Directive 1997 • Conducted by voluntary survey • Some data becomes publicly available • Regularly publishes summary reports 2000 • Based on existing SEC disclosure (Form 10-K) • Industry-based metrics and disclosures 2011 2015 • Sustainable Development Goals (SDGs) • Reporting on progress Frameworks for sustainability reporting EU Action Plan on Sustainable Finance (2016) • Initiated by Bank of England • Stranded asset risk; market stability • Disclosure in existing financial reports 2015 • Reorienting capital Flows towards sustainable investments • Mainstreaming sustainability into risk management • Fostering transparency and long-termism 2016
- 16. 16 Refinitiv -The Next Step in ESG Integration Regulatory Frameworks around the Globe North America • Global competition • Shareholder initiatives • Pension litigation UK • TFCD (financial stability) • Anti-Slavery • Am. to 1995 Pensions Act South Africa • Corporate governance leadership • Stock exchange – listing requirement UN Global Compact • Leading corporate entities, NGOs EU countries • 2014 EU Directive • 2015 Paris Agreement • B: Vandebroucke Law • D: Am to Danish Fin Statement Act • F: Grenelle Law, Energy Transition Law – A173 • I & G: Mandatory ESG Disc for PFs • EU Commission – HLEG China / Asia • Carbon emissions trading • Stock exchanges – listing requirements Norway: • Norwegian Act on Annual Accounting Japan • Principles for Financial Action for 21st Century *in Italic: Asset Management related
- 17. 17 Refinitiv -The Next Step in ESG Integration Action Plan on Financing Sustainable Growth Mapping and links of the 10 actions along the investment chain Reorienting capital flows towards sustainable investments Mainstreaming sustainability into risk management Fostering transparency and long-termism 31 2 Sustainability Benchmarks Foster Sustainable Corporate Governance Investment Advisors Households Companies and Projects Banks Institutional Investors, Asset Managers, Insurance Companies Service Providers (Rating Agencies, Data providers) Create Standards and Labels 2 5 ESG in Ratings and Market Research 6 Sustainability in prudential requirements 8 10 Investment in Sustainable Projects 3 EU Sustainable Taxonomy 1 Institutional investors duties 7 Sustainability in Disclosure & Accounting 9 Incorporate Sustainability in Investment Advice 4
- 18. 18 Refinitiv -The Next Step in ESG Integration EU Timeline of Sustainable Finance December 2015 Paris Agreement High-level Expert Group on Sustainable Finance (HLEG) December 2016 July 2017 HLEG Interim report One Planet Summit December 2017 January 2018 HLEG Final report Action Plan on Financing Sustainable Growth March 2018 Technical Expert Group (TEG) starts their work July 2018 May 2018 Legislative Proposals 2019 - 2022 Delegated Acts
- 19. Appendix II. Refinitiv IndexServices
- 20. 20 Portfolio Indices –Trends & Refinitiv’s Place 1. Active management is moving to passive • Passive asset managers are under cost pressure and are targeting indices as a source of savings – willing to use less costly alternatives for specialty indices • Active asset managers considering migrating some of their active strategies to lower cost index funds – want to maintain their IP 2. Specialty / smart beta / fundamental indices behind this move will not be dominated by the main benchmark providers, as clients may want lower cost, greater flexibility 3. Increasing regulation in Europe will force index providers, self-indexing passive fund managers and ETF issuers to turn to authorised administrators Specialty Indices Portfolio Indices Market Indices Refinitiv Indices Focus Benchmark Indices Specialty Indices essentially replicate an investment strategy by giving exposure to a theme, factor, or alternative data are being issued a great frequency. This is the area the most growth is expected in terms of • number of indices being issued, • new money being allocated. While institutional asset managers generally prefer products that track benchmark indices, there are multiple uses for non-benchmark indices by product issuers: • Products aimed at the retail market • Products that aim to provide strategic exposure • Products that aim to provide exposure to a Specialty Index an investment strategy, a theme or factor, rather than a market Refinitiv - The Next Step in ESG Integration
- 21. 21 Pillars of RefinitivIndex Services INDUSTRY LEADING PLATFORM OF FINANCIAL DATA DECADES OF INDEXING EXPERIENCE CALCULATION – ADMINISTRATION - PARTNERSHIP TRUST PRINCIPLES FCA AUTHORIZED FOR EU BMR GOVERNANCE • Authorized by the FCA to administer benchmarks compliant with EU Benchmark Regulation (EU BMR). • Regulated benchmark administrator for WMR since 2015 under MAR 8.3. • Full support of IOSCO principles in the administration, calculation and development of indices. • Since 1941, our Trust Principles have ensured the highest ethical standards across all of our businesses, services and products. EXPERTISE • A team of over 100 staff specialized in indices and benchmarks. • In-house research and investment expertise validate methodologies, develop rules and accurately back test. • Over 12,000 unique indices, 95% calculated in real time. Minimum 60-second reporting period, with a majority set for 15-second intervals. • A progressive commercial model with fewer usage restrictions and less pricing complexity compared to other providers. PLATFORM • The most comprehensive platform of public and proprietary data available enables Refinitiv to speed time to market and create innovative indices based on most asset classes, strategies or investment concepts. • Extensive global distribution network and brand recognition. • Highly resilient platform designed for real- time calculation, 24-hour index management and operations. • Secure custodial relationship to ensure protection of your intellectual property. Refinitiv - The Next Step in ESG Integration
- 22. 22 PLUS Governance & Branding (RefinitivBrand or Co-Brand) PLUS Rebalancing Index Calculation & Distribution Refinitiv Index Service Levels In all our services levels, ownership of the Index IP remains with our client Client Provides Constituents at every rebalance Client Provides Methodology and Refinitiv manages the constituent list. Client Provides mandate to Refinitiv to administer the index. Increasedclientseparation 1 2 3 • Flat fee per index, one index is defined as one portfolio, includes multiple variants, such as total return, price return, net return, currency versions • Included license to use underlying Refinitiv Pricing Data for index calculation purposes (separate exchange license may be required) • Refinitiv data for index rebalancing to be purchased separately • Basis points based on AUM tracked or benchmarked against the index • Fee level depends on complexity and frequency of rebalance, underlying data sources, and regulatory risk • Allows client to leverage Refinitiv’s licenses with 70+ exchanges globally to use data for index calculation • Licensees to the index sourced by client • Flat fee per index • Needs to use native Refinitiv content as criteria to select and weigh constituent securities • Included license to use underlying Refinitiv data for index purposes Refinitiv - The Next Step in ESG Integration
- 23. 23 The Index ServicesFramework KEY POINTS • Refinitiv is an independent entity whose purpose is to deliver unbiased performance measurement. • Full transparency using data that meets the highest standard of integrity. • A designated Index Manager is responsible for the integrity of each index to meet IOSCO standards and EU BMR. • Index levels and constituent lists available via multiple delivery channels - EIKON, ELEKTRON, Datastream, streaming APIs, Refinitiv Indices FTP server and selected third party distributors. DATA SOURCES OPTIMIZE METHODOLOGY Market-capitalization Price-only and multiple return variants published in real-time or EOD UNIVERSE SELECTION Special weighting scheme, i.e., value, risk, equal, GDP, capped, special Factors such as: - Value Momentum - Analyst Revisions - Intrinsic Valuation - Short Interest - Credit Risk Trading hours, calendar and currency Standard and bespoke calculation methodology and corporate action handling Asset Class Region Currency Quality Theme Sector SELECTION & WEIGHTING SCHEME CALCULATION RULES DATA MANAGEMENT Refinitiv data including: - Market & Pricing - Company - Economic - Fundamental - Reference - Qualitative - Corporate Actions Positive screening Negative screening Sequential Currency hedge Long/Short Leverage Capped Refinitiv Index Oversight Committee (TBD) Refinitiv Index Managers manage the index development workflow Refinitiv - The Next Step in ESG Integration
- 24. 24 Asset Class Coverage& Inputs GLOBAL EQUITY INDICES Highly correlated and transparent, Refinitiv offers over 5000 free float market cap weighted indices for 51 countries and include large, medium and small cap companies with history to 1999. CONVERTIBLE INDICES Refinitiv Convertible Bond Index is the premier benchmark in its asset class. COMMODITY INDICES The CRB Index is a flagship benchmark represented by an extensive line- up of sub-indices covering 19 commodities. Founded in 1957, it is the oldest index of commodity futures. Periodic component updates, weighting and rebalancing schedules reflecting market shifts have kept the CRB relevant to investors worldwide for 50 plus years. SPECIALIZED INDICES Refinitiv develops and published specialized indices based on niche sectors such as carbon-free, infrastructure, luxury, and clean technology, as well as themes ranging from Diversity & Inclusion to climate change. Limited coverage in fixed income include SGD, CAD, and Malaysian bond indices. OVER 3,000 BANKS & BROKERS PRICING OVER 200,000 INSTRUMENTS DAILY REFERENCE DATA & PRICING 9.3 MILLION FIXED INCOME SECURITIES STARMINE FACTORS ON OVER 3,000 COMPANIES 400+ ESG KPIs ON OVER 7,000 COMPANIES FUNDAMENTAL DATA ON OVER 70,000 COMPANIES TRBC SECTOR CLASSIFICATION WITH 5 LEVELS AND COVERAGE OF OVER 30,000 INSTRUMENTS EQUITIES PRICING FROM MORE THAN 160 EXCHANGES WORLDWIDE THE MOST COMPREHENSIVE I/B/E/S ESTIMATES IN THE INDUSTRY Refinitiv - The Next Step in ESG Integration
- 25. 25 Guided by IOSCOPrinciples, Prepared for EU BMR Refinitiv has put compliant technical solutions and management processes in place — from collection of data and index calculation to global distribution and input/calculation surveillance — everything necessary to create reliable, stable, high quality indices. The subsidiary Thomson Reuters Benchmark Services Ltd has obtained EU BMR authorization by the UK FCA. AccountabilityGovernance Benchmark Quality Methodology Quality Refinitiv Independent Oversight Committee Oversight of third parties Conflicts of Interest Control framework Submitter code of conduct Data sufficiency Hierarchy of data inputs Transparency of determinations Periodic review Surveillance & Monitoring Design Content Changes Transition Consultation Complaints procedures Audits Audit trail Cooperation with regulatory authorities Applies to all indices administered by Refinitiv Refinitiv - The Next Step in ESG Integration