By Yasin Rosowsky, Co-CEO, Arabesque AI
Asset managers used to have a role that, though often challenging, had a clear objective – financial returns. At the end of the day, it was purely performance that dictated whether they were successful or not.
No longer. Managers now must balance multiple objectives as the demands of their clients have evolved, and nowhere has this been more keenly felt than in sustainable investing. Customers are now demanding products aligned with both their investment objectives and their values. In fact, increasingly, closely held values and business objectives are one and then same. But this changing demand poses an enormous problem for the unprepared.
EnvironmentalEnvironmental criteria consider how a company performs as a steward of nature. More, socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. More and governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. More – or ‘ESG’ – considerations to assess are many and diverse. If you speak to different ratings agencies, you will likely get a different answer each time on the metrics they use to judge how impactful or sustainable a business is. The rapidly growing pool of different ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting frameworks – over 90 at the time of writing – has only muddied the water further.
Put simply, you must process and interpret a huge volume of diffuse and often incomparable data to get anywhere near an investment strategy that could be considered sustainable. More than this, labelling a product as ‘green’ won’t cut it anymore: asset managers must provide multiple products to cater to increasingly diverse investor values. Most asset managers simply don’t have the resource to accommodate this.
The result of this is that most investment houses are losing competitive ability versus the biggest players who have the firepower to build the teams capable of delivering customised products. And this also represents a bottleneck preventing trillions of dollars of investor capital being diverted into sustainable businesses that will bring us closer to fulfilling the Paris Accord goal of limiting global warming to 2C by 2050.
Artificial intelligence and automation are at the forefront of solving this problem. AI is poised to provide asset managers with the analytical power to generate truly sustainable and values-aligned investment strategies at scale. Investment professionals can now build hyper-customised active strategies that can be tailored to individual investor beliefs.
Arabesque’s newly released ‘Automated Chief Investment Officer’ (ACIO) platform, for example, can create millions of unique and sustainable investment funds. Each can be generated at click of a button or even through a smartphone. From data collection, integration, model testing, training to risk profiling, delivering a single strategy would currently take a human approximately 6 months. ACIO can do it in as little as 20 minutes.
Not only could this open up sustainable investing to the whole investment market for the first time, but it will disrupt the sector by levelling the playing field to enable even the smallest investment houses to create the volume and variety of funds that is currently the preserve of the only world’s biggest asset managers.
The asset management industry is increasingly looking to leverage technology for cost-efficient product development, alpha generation and delivering a customised and differentiated client experience. Now, the power of AI to handle the sprawling complexity of non-financial data can let asset managers build the products which the market is demanding.
About the author:
Dr. Yasin Rosowsky is the co-CEO of Arabesque AI. He holds a PhD from University College London in machine learning applied to financial forecasting, and previously led AI research at Arabesque Asset Management.
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