AI has been a tool in the investment industry for some time, but connecting Environmental, Social, Governance (ESG) data to the financials of a company is rarely done in a systematic fashion or in a way that provides actionable data for investors. This is one area where AI can play a significant role.
”ESG data tends to also be backwards looking rather than predictive which makes no sense in a US$50 trillion-dollar industry, since all other data in the investment sector is in real time, accessed via Bloomberg and other providers,” said William Cox, CEO and one of five founders of Yieldrive, a Swiss fintech company, created to remedy the current issues with ESG reporting and data.
“For us, this is a total contradiction because ESG can be used to anticipate. We deliver daily updates to asset managers using our AI on all our 170 indicators. ESG is more real-time for us. And this is where AI is needed,” he said.
According to Reuters, companies spend on average US$ 220,000 to US$ 480,000 on sustainability ratings to satisfy investor demand. “But these ratings do not connect to the companies' financials,” Cox said. Yieldrive uses proprietary AI and algorithms to calculate the financial impact of ESG on the risk/return profile of a company, or ‘ESG in Dollars and Cents’, the company’s calling card.
Cox, who took on the CEO role in January having previously been responsible for data analytics, said Yieldrive takes a bottom-up approach to gathering publicly available data, using its proprietary AI. The data is then translated using algorithms and methodology to produce actionable data. “We analyse not only the financial viability of companies but also their commitment to ESG factors. Ultimately, we can analyse to what extent a company’s ESG initiatives contribute to their fair value,” he said. "This is a risk-management tool for fund managers," Cox noted, adding that you can lose a lot of money if you don't get down to hard numbers in ESG.
He referenced the infamous case of Swiss bank Julius Baer, which had to write off a Swiss Franc 586 million loan to Signa Holdings, an Austrian property group hit by rising interest rates. “If the ESG credentials had been analysed properly it would have been apparent that this was a greenwashing case as there was no concrete, quantified or relevant data available, only things that made them look good,” he said.
“Investors want to anticipate the future to a certain extent. If we can quantify the financial impacts of human processes, which includes ESG, then we can help investors anticipate if a company is going to do well, if it is resilient, where it is resilient and whether the ‘is the ship built well' If it is built well, it can weather any storm,” he said.
A PwC survey from 2023 shows that over 80% of asset managers investing in ESG-related assets are unwilling to compromise more than 100 basis points of return for ESG and most are not willing to compromise on anything. Cox said that if ESG is properly applied compromising performance is not necessary as ESG can be a value driver rather than a value detractor.
Asset managers come to Yieldrive in their quest to find the actual financial strength or ESG impact on the risk/return profile of each component in a portfolio. “It is not clear how the myriad of ESG, climate change, and biodiversity standards relate to value creation, how they drive revenues, margins, reduce risk or the cost of equity capital. When they come to us, they want to take all the noise out to find out what the financial impacts are on performance and financial resilience,” he said. "Reporting on all the various standards is arduous for asset managers and companies and only some of the criteria are connected to financial results; we have been able to find 170 such connections or indicators," he said.
Cox also pointed out that the nexus between AI and ESG is currently mainly on the reporting side which is short-sighted. “If you have all the components of our data, you can put these in the Portfolio Adjustor and it will track it every quarter or month and show what the average weighted performance level of the portfolio is,” he added.
“By getting actionable data on the impact on revenues, margins, fair value, earnings per share and cost of equity capital you can probably do more with that than by ticking 300 boxes in an ESG report,” he said, adding that collecting better, higher-quality data and prioritising that and making the connection between ESG and hard numbers makes the reporting process more efficient. “What everyone has been doing so far is superficial because the market is characterised by too much raw and non-actionable data not linked to financial returns,” he said.
Cox developed the algorithm, which involves 20-25 calculations to arrive at the results, with colleagues over 15 years ago and then translated it into a technological basis for assessing the financial ESG of thousands of companies. Previously, the algorithm was used in two indecies run by Euromoney media. “It showed that it is possible to measure the impact of ESG on companies’ share prices, margins, revenues, cost of equity, earnings per share and fair value,” he explained.
Yieldrive has filtered its sources down to 170 reliable, serious sources of information. “Our proprietary natural language processing AI scrapes hundreds of billions of information elements from regulatory filings, annual and ESG reports and credible news media on currently 4600 listed as well as unlisted companies over a 10+ year period."
Yieldrive currently has 500 billion data points and aims to provide better-informed decisions and continually improve accuracy as more relevant data becomes available. “We have an innovation schedule for expanding and improving our AI because we cannot ever think that we are ‘done’ or we will be left behind because the technology is developing so fast,” he said.
The quintet of founders includes, apart from Cox, Hugo Masset, Noel Norking, Dominique Küttel and Bojan Simic all with extensive experience in finance, technology and capital markets with a belief that sustainable companies are the most resilient ones and the future yield-drivers, hence the name.
Yieldrive recently joined forces with Moore Hong Kong, an international accounting and advisory firm, to provide its AI-driven ESG-data and calculations to companies and financial institutions in Asia.
By Pirkko Juntunen
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