Stamford, CT-based K2 Advisors, a hedge fund investment advisor, with $11.2 billion in assets under management, is developing a new ESG-focused hedge fund investment platform. As part of the platform’s mandate, the fund managers will integrate proprietary ESG data and analysis from research provider KPX Global into their investment strategies. The data provided by KPX will allow K2 Advisors to generate a consensus ESG grade for the managers on their platform and will allow fund managers to offer social screens to their investors.
High on the list of data that KPX provides managers, investors and corporations is information on the “real” impact of greenhouse gas emissions of a company. “We do advanced data analysis and try to close the gap on any missing information in this very complex calculation,” said Bill Mills, CEO and Co-founder of KPX. The Birmingham, AL and Melbourne, Australia-based research provider also works with fund managers to promote engagement with corporations when addressing ESG issues.
“Climate change is one of the most important issues we are facing today, so having that be our initial engagement will be well received,” said Dan Elsberry, senior managing director at K2 Advisors. The issue is a primary concern across the board from millennials to baby boomers, he noted. As such, “Franklin Templeton, as a company, has a real focus on ESG today, and our proposed fund platform is one of a number of initiatives we are working on within the firm,” he said.
ESG leads to Alpha
The benefits of incorporating ESG analysis and engagement into a fund’s investment strategy has been well documented in the industry and many allocators and investment managers are now taking it to heart. “There is an opportunity for Alpha when conducting corporate engagement focusing on environmental and social issues in particular,” said Mills. “Measurable outcomes on these issues are beneficial to a corporation from an operating or brand perspective, when such information is made available to stakeholders on a transparent and reliable basis,” he said.
Making use of social media and artificial intelligence
The process that KPX Global uses in coming up with its analysis is somewhat unique, in the research space, in that it makes use of artificial intelligence (AI), advanced statistical applications and social media analysis to gather information and to develop multi-factor asset models for portfolio managers that focus on ESG metrics.
The researcher uses machine learning to come up with advanced statistics to locate challenges in the environment a company may face and to gauge its carbon footprint. “It is a fundamentally important part of a complex calculation we do, and we have various ways of pulling the information, because often the disclosure pages of a company’s annual report does not include all the information we are looking for or the information is not accurate because of other limitations, ”Mills said.
KPX also does social media analysis to determine what has higher or lesser priority in stakeholder conversations. We analyze the intent of the conversations and where those conversations are goings,” said Mills. “From an investment perspective, we link to topics that are important to both stakeholders and corporations in terms of their brand or operating profitability,” he said. “The progress on managing improvement on these impacts or topics provides a forward-looking insight to increased future profitability and stakeholder acceptance.” There is also power in numbers. “Using social media as a form of communication will allow more people to follow along and participate in the process,” Elsberry said.
To compile its research, KPX is also collaborating with Edinburgh-based SocioVestix Labs, a socially motivated enterprise that uses advanced financial data science to provide ESG analytics. The company’s data science unit develops social media analytics methods to measure the attention and emotions that societies direct towards individual UN Sustainable Development Goals (SDGs). Its investment statistics unit develops sustainable measures of investment performance, which assess the long term returns and downside risks which investors face in the markets.
Promoting engagement over divestment
One of the goals of this type of analysis is to allow managers to take a more forward looking and actionable approach to investing, giving them the opportunity to engage with companies about ESG issues. “The idea is to promote a different form of corporate engagement that is stakeholder centered, not simply engagement by those who own securities within a corporation,” Mills said. “The first step has to be one of respect and collaboration over a mutually important impact, not accusing corporations but instead sharing ideas.”
Elsberry agrees and sees the benefits of this approach. “When engaging with a company, the more you understand about how they compare with their peer groups in ESG rankings of greenhouse gas emissions, for example, gives the engagement more leverage and could improve the chance of success when speaking to them,” he said.
The managers on the K2 Advisors platform will be encouraged to work with companies to promote change as opposed to just being a thorn in their side. “We want to be collaborating with companies more to identify environmental or social issues pertaining to greenhouse gases, product safety, and other things that are important to society and the corporate sector, and identifying those corporations where there has been improvement and where there has been an impact,” said Mills. “We want to create a conversation around the impact, keeping in mind that impacts, so identified, must be important to corporations and the stakeholders and the results must be measurable,” he emphasized.
No ESG pressure
Elsberry made sure to point out that all of the managers on the K2 Advisors platform are not ESG managers, per se. No ESG investment restrictions are being put on them. Instead, the asset manager is simply giving its fund managers ESG research to include in their overall investment assessment of the companies they are looking at. That said, none of the funds will be investing in tobacco companies because “no one thinks tobacco is good for you,” Elsberry noted.
Moving toward an ESG-focus is nothing new for K2 Advisors. “K2 has been engaged in the responsible investment arena for the past 15 years, and we now feel we have entered ESG 2.0,” said Elsberry. “Momentum is strong right now, with $23 trillion invested globally in responsible investments. It’s the fastest growing area in investment; it’s an important time, and people are now starting to understand that,” he said.
K2 Advisors was acquired by asset manager Franklin Templeton in 2012. About 70% of K2’s assets under management are maintained in custom portfolios, representing a client base comprised of public pension plans and other institutional investors.