The US index technology provider is seeking to leverage Impact Cubed’s ESG and impact analysis on its alternative industry classification.

MerQube has launched a partnership with Impact Cubed to create bespoke next generation ESG indices as part of its strategy to enter the European market with a differentiated offering and follows the alignment with the Benchmark Regulation (BMR) and the approval by the UK Financial Conduct Authority (FCA).

ESG is a very important area for MerQube to engage in given the nature of the market and where it's going - Vinit Srivastava, MerQube

“ESG is a very important area for MerQube to engage in given the nature of the market and where it's going,” the company’s CEO Vinit Srivastava (below), told SRP.

“If you look at the large ESG data vendors, and some of the issues there, from a commercial perspective, a lot of the developments have been in sourcing data and offering clients very limited choices. If you want to work with X, you got to use this data set.”

That approach, according to Srivastava, comes “with costs and all the downsides built in”.

“It comes with the limitations that an index provider has in terms of its indexing capability and data,” he said. “The open architecture approach has been a difficult one to pull off. That's where we were looking for innovative providers who can work with us and don't have those kinds of constraints.”

Srivastava notes that at the end of the day clients need choices of who they want to work with on the data side and on the indexing side to build the right solutions.

“Especially for large managers like pension plans, asset managers, investment banks, which are servicing clients, ESG is a very customised space,” he said.

Libby Bernick (pictured), CEO of Impact Cubed, notes that the partnership made sense as the two firms have a more entrepreneurial mindset that is “open to customizability and innovation, and open to providing superior customer service in ways that sometimes these big listed firms are unable to do”.

“We are very familiar with the way of doing things at big publicly listed company and totally understand the importance of having processes and accurate data as well as a rigorous approach to data that investors can use for making capital allocation decisions,” said Bernick. “We think it's that entrepreneurial mindset backed by the institutional grade schooling and data and know how that we got that is something unique about the partnership as well.”

According to Bernick, Impact Cubed has done some things differently compared to other data providers.

“We were founded by an investor so everything that we do starts with that investor mentality and how is the data going to actually be used in the context of a portfolio and investment solution. That gives us a different mindset,” said Bernick.

However, the key element of Impact Cubed’s offering is that it offers “more precise and granular data”.

Mix and match

According to Bernick, conventional ESG data was started by index providers which use traditional industry classification systems – an approach that would not work for new entrants.

“We knew at Impact Cubed that conventional approach is not sufficient for ESG or impact analysis,” she said. “Instead of taking that very narrow view, we decided to build a much more precise and detailed classification system that looks at over 2,500 business activities as well as the regions where those activities occur.”

Impact Cubed’s approach to ESG is to provide a 10-times amplified detailed and precise view on what companies make.

“If you're creating an index that you want to be customised to industry preferences, you just have a lot more choices and if you are creating an index around a particular theme, you have a lot more different ways to mix and match to create that theme,” said Bernick.

“That's one of the very unique differentiators of our data. Because we take that portfolio and investor view, we're applying this data in what we would call a 3D framework to modern portfolio theory which has two dimensions - risk and return.”

The data company has added a third dimension ESG or impact with its “quantitative and precision approach” which enables it to quantify risk-return and impact.

According to Bernick, investors, especially those in Europe, want their own custom blend ESG that matches their goals.

“They might want to have a strategy that is aligned for climate, but also has some aspects around social considerations and gender equality, for example,” she said.  

“Instead of dictating which kind of ESG they should have we're offering a way for investors to have their own custom blend, whether that's around environmental matters, climate biodiversity.”

A second aspect is the continued interest in climate globally with European investors coming up with a number of ways to look at climate.

“This remains a hot topic but there are also new additions to the conversation like biodiversity because it's very relatable to investors,” said Bernick, adding that investors relate to solutions that provide “more impact”.

“That's another area that we're looking at. Being able to come up with those strategies that are very relatable to investors is important. A lot of the ways that ESG has been done in the past has been focused on how to prevent the company from experiencing some financial risk, as opposed to how do we maintain natural systems in the earth or provide good social, equitable solutions for our economies and how do we grow the economy.”

Customisation

MerQube is seeking to leverage the partnership to develop customised solutions for large asset owners and respond to the demand coming from the sell side.

“The idea is to draw on each other's strengths in both of those areas, whether it's investment banks doing customised ESG solutions for the private wealth clients, or the asset managers and asset owners offering it for their investment objectives,” said Srivastava.

The goal is not to bring another 25 indices to the market but build real solutions for our clients. And I want to distinguish it from where you're taking a data set, applying screens and launching an ESG theme index. We are looking at providing institutional grade solutions to the ESG space. The screens and the other items are implicit.”

Looking back at the last five to seven years, added Srivastava, investors have moved up the curve in terms of both their knowledge of what they're buying, and also in terms of innovation.

“The conversation now is around impact as opposed to ESG,” he said. “We were having discussions about impact five years ago, but there was nothing to target realistically. We are now beyond the initial discussions which were focused on how to minimise downside risk.”

Because the ESG debate has evolved, the whole notion of transparency and customization is now more accessible to investors and provides a way for investors to have more transparency on what they're investing in.

“The same thing goes for ESG. This partnership provides the transparency - one of the impact hallmarks,” said Srivastava.

“We’re providing factual data, rather than subjective and opaque scores. And we're able to do that because we have a very digital approach to doing ESG and MerQubes’ advanced indexing approaches, which just lend itself to the structured products market in ways that we had never envisioned before.”

Because there are many different investor goals around ESG - they may be related to risk, return or certain values that investors have -  there is scope to being more granular to match those needs, according to Srivastava.

“The opportunity here is not to pre impose ESG views or goals on investors. Instead, it's putting ESG or impact on a level playing field. We're finding ways to get to the roots, so to speak of what investing is all about, and that is the investors’ desire to make investments that meet their goals,” concluded Srivastava.