The “sushi of finance” in Asia

But what he is doing with Arabesque is departing convention. The asset management firm is breaking new ground in the financial world with what it calls the “world’s first quantitative approach to sustainable investing”.

This means it has developed a systematic way to identify more than 1,000 superior stocks out of over 77,000 companies listed across the world using unique algorithms – in place of humans – based on the companies’ ESG performance.

ESG refers to environmental, social and corporate governance - also called ‘non-financial information’ - which is used by the finance community to measure the sustainability of a company. It looks at the firm’s impact on the environment and local communities and how it performs on issues such as labour rights.

Speaking to Eco-Business in a recent interview in Singapore, the Egypt-born banker – who was formerly Head of Global Markets for Europe at Barclays – says: “I’d like to think that in Asia, we’re the sushi of finance.”

“We’re tasty, healthy and transparent… This is a smarter way of analysing companies. We’re less risky because we have a better screening process,” explains Selim, who was born to an Egyptian father and a German mother and raised in Germany and Switzerland.

Arabesque’s “investment universe” of companies that boast good ESG performance forms the base for Arabesque’s two funds, Prime and Systematic, which since their launch in August 2014 have outperformed the benchmark of the MSCI All Country World Index.

The firm is upending the notion that responsible investing means underperformance. “We’re mainstream and we’re outperforming the main indices,” he says. 

When ranked against their respective Morningstar peer groups – across both ESG and non-ESG funds - the Prime ranks in the top 30 per cent while Systematic is in the top 10 per cent. As of November, Prime outperformed its benchmark by 0.41 per cent since inception, while Systematic outperformed the same index by 3.85 per cent.

From stockholder to stakeholder 

Arabesque started in 2011 as a unit at the British banking giant Barclays, where Selim served as head of the bank’s institutional business for Europe in London. Prior to this, he has 20 years of experience in international investment banking, having held senior positions at UBS, Morgan Stanley and Credit Suisse.

At Barclays, he and a team worked with professors from the universities of Stanford, Oxford, Cambridge and Maastricht to develop Arabesque’s unique approach combining sustainability research with sophisticated quantitative financial models.

“We asked ourselves, can we find a positive correlation between a company’s sustainability performance and the performance of the company?”

Most people might think not. Selim says these naysayers think: “Hang on, if a company cuts corners, doesn’t pay people well, pollutes the environment, they can probably make more money”.

This might be true in the short-term, but in the long run it is clearly not the case, he says.

Arabesque teamed up with Oxford University to prove it. The result is a report titled ‘From the Stockholder to the Stakeholder’ which outlines the evidence that there exists a significant connection between sustainability and financial performance.

This growing body of evidence has proven that responsible does not mean poorer returns. As Selim notes, sustainability has now entered mainstream business conversation.

Over 72 per cent of S&P500 companies are now reporting on sustainability; and in Asia, stock exchanges in Singapore, Malaysia, Hong Kong and Thailand, to name a few, have mandated sustainability reporting from their listed companies.

Arabesque’s algorithms process a mind-boggling 100 billion data points scoured from sustainability reports, Bloomberg data and more, to identify the best-in-class companies.

“This merging of global data allows you to better understand companies’ performance in ESG. We consider this the DNA of a company – it doesn’t replace fundamental analysis but adds another information layer,” he says. Fundamental analysis is a term for how the financial performance of companies are assessed.

Arabesque’s approach combines technology with the values of initiatives such as the United Nations Global Compact, the UN Principles for Responsible Investments (UN PRI), which involve voluntary commitments by companies and investors to meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption. 

Any breaches of these commitments and the company is out.

This, combined with balance sheet and business activity screening, helps Arabesque’s funds deliver superior returns, he says.

In 2013, Selim made the decision to buy out Arabesque so that it could be run independently. He had a vision for Arabesque to lead the global movement in mainstreaming sustainable investing.

Currently, there is a huge lack of transparency on how funds generate profits. He asks, for example: Has it come at the expense of child labour, corruption or pollution? 

“What bugs many people is the fact that nobody has a good relationship to the funds unless you’re a banker or hedge fund manager,” he explains.

Arabesque’s achievements - it clinched the ESG Manager of the Year award in 2015 and 2016 by Euromoney’s Global Investor/ISF - was further evidence that one can indeed profit from investing sustainably.

The firm has attracted some high-profile leaders as its board members, including Professor Robert Eccles of Harvard Business School, founding executive director of the United Nations Global Compact Georg Kell and former president and chief executive of Calvert Investments Barbara J. Krumsiek.

Controversial companies

Interestingly, Arabesque’s approach to investing does not mean that they exclude companies with problematic reputations such as those in the oil and gas industry.

Fossil fuel divestment, for example, is gathering pace around the world as a response to tackling climate change, with an increasing number of investors pulling out of companies involved with the exploration, extraction, production or financing of fossil fuels. 

Selim says that Arabesque’s approach is not based on excluding certain industries, but based on a “best-in-class” approach.

“

If you want to influence the oil and gas sector, the way to approach it is not ‘don’t invest’, that’s not going to change anything because somebody else is going to invest.

What’s going to change things is if you only invest in the best performers. Exclude the bad ones, and work with the good ones to transition their business.

Omar Selim, chief executive, Arabesque Partners

“The reality of life is that we still need fossil fuel-based products. But we want to ensure that this is done as responsibly as possible. So we look at all the companies and start comparing how they do on water or energy consumption, and their performance on labour issues, governance structures,” he explains.

“We believe in engaging companies. So if you want to influence the oil and gas sector, the way to approach it is not ‘don’t invest’, that’s not going to change anything because somebody else is going to invest. What’s going to change things is if you only invest in the best performers. Exclude the bad ones, and work with the good ones to transition their business,” he says.

“I don’t know a single large fossil fuel company that’s not thinking about renewable energy. Or any automotive firm that’s not thinking about electric vehicles. They’re all thinking about the global transition (to a low-carbon economy). So you work with them, and you support their transition. If they are against it, then of course don’t invest. I would argue if you just exclude the entire industry, you will not get far.”

Looking ahead

While the fund is still small at US$50 million of assets under management due to a non-compete agreement which restricted their activities, Selim says that Arabesque currently has accumulated investor interest of more than US$1 billion, “which we hope to close within 12 months”.

He believes that amid a falling interest rate environment, equity has overtaken fixed income as the darling of the investment world.

“Something unique is happening in the market that I think many people don’t realise – which is that when you hit a zero interest rate environment, fixed income as an asset class hits a ceiling.”

“Equity has become the new fixed income. The spirit in which people invest is changing. Fixed income is risk transparent, but equity’s risk sharing. In fixed income, I don’t care if the company survives or not, I just want to collect the collateral. In equity, I have an interest that the company does well. I think this will fundamentally change the way people start looking at investments,” he says.

Apart from using ESG data as another layer and investing into equities, Selim says that Arabesque expresses its investment values through real investment into companies, not just in indices or derivatives.

In the years ahead, it has its sight set on aggressive expansion in Asia – a region he says is “incredibly dynamic and with so much potential”. It has, for example, attracted a lot of interest from Chinese investors. There is a growing appetite for sustainable investments in Asia that’s not been seen before, he adds.

That’s the reason why the firm, an “Anglo-German ESG quant fund” headquartered in London and with a research hub in Frankfurt, decided to set up an office in Singapore recently. It wants to tap the growing demand, and is also setting up offices in locations such as Malaysia, Luxembourg, and the United States.

Selim also plans to make the fund widely available to retail investors via fund distributors, as he firmly believes that “sustainability should not be a luxury for the rich”.

And he might look the classic banker, but he says: “I’m good at finance, not passionate for it.”

“With Arabesque, I’m trying to combine my passion for nature with my expertise in finance,” he explains. It is this curious combination that inspired the name “Arabesque”, which describes art, the geometry of patterns and the importance of symmetry in nature.

He hopes that the firm can be a trailblazer for the finance world, and a catalyst in making sustainability mainstream.

“In the near future, ESG will become the standard. Instead of opting in for ESG, you’ll have to opt out. We hope to help everyone catch on.”