In 2017, company founders, Josh Gennet and Tristan Elwell, recognised the opportunity of utilising ESG concepts and data as a new alpha source for investment returns. They assembled a team and began to perform detailed analysis on ESG data sets in order to validate the hypothesis. The team recognized that ESG investment principles were under-represented at both the investment strategy and investment management levels within the absolute return / alternatives industry.
The Fund has an ESG impact objective: the fund seeks to ensure appropriate alignment on key ESG metrics evaluated across our long and short portfolios, such as Corporate Governance, Carbon Emissions, Product Carbon Footprint, and Health & Safety. The Fund seeks to have a positive ESG impact in its investment allocations at the portfolio level, and to demonstrate this to investors by reporting on Fund ESG characteristics. ECO’s ESG philosophy is that by taking short positions in ESG laggards & deteriorators, we increase the cost of capital for companies that are ESG laggards, or are slipping behind their peers on ESG criteria. The Fund regularly reports on a series of key ESG metrics in order to demonstrate to investors that capital is being deployed in a manner consistent with the ESG impact objective. The Fund reports its impact performance and ESG positioning on various sustainability issues/topics.
Our ESG data process seeks to identify stocks with either leading or improving ESG characteristics for potential inclusion in the long portfolio and poor or deteriorating characteristics for potential inclusion in the short portfolio.
For each company in the universe, data relating to ESG factors in the Environmental Pillar, Social Pillar and Governance Pillar are analysed. Examples of data for each pillar include (but are not limited to):
- Environmental Pillar: Carbon emissions, product carbon footprint, water stress, raw materials sourcing, product packaging waste, pollution, toxic waste.
- Social Pillar: Health & safety, supply chain standards, privacy & data security, staff satisfaction, industrial relations.
- Governance: Diversity & gender equality, executive pay, accounting standards, related party transactions, alignment of interests, tax practices, business ethics.
Companies in our universe are scored and ranked based on their performance on Environmental, Social, and Governance data metrics such as those outlined above. However, we also believe it is important to incorporate the concept of ESG materiality. ESG materiality involves identifying and understanding the relative importance of E,S, & G metrics to each company based on the industry in which they operate. Our ESG assessment (i.e. rank/score) of a company will always be derived from a combination of E, S & G metrics, however, the relative importance (as a business risk driver) of each E, S & G metric is also taken into account.
The ECO Advisors ESG Absolute Return strategy commits to exclude from the portfolio businesses involved in the following business activities in the long book:
Adult entertainment production
Adult entertainment retail & distribution (>5% revenue)
Conventional weapons components (>5% revenue)
Civilian firearms & ammunition production & retail
Gambling (>5% revenue)
Tobacco retail (>5% revenue)
Thermal coal (>5% revenue)
Arctic oil and gas (>5% revenue)
Oil sands (>5% revenue)
UN Global Compact Violations (operational violations in last 2 years)**
The ECO Advisors ESG Absolute Return strategy commits to exclude from businesses involved in the following business activities in the short book:
Adult entertainment production
Adult entertainment retail & distribution (>10% revenue) Controversial weapons* (>10% revenue)
Tobacco retail (>10% revenue)
ECO’s ESG philosophy is that by taking short positions in ESG laggards & deteriorators, we increase the cost of capital for companies that are ESG laggards, or are slipping behind their peers on ESG criteria. However, in order to maintain industry risk balance, certain exclusions on the short side are implemented as outlined above.
*Cluster munitions, landmines, biological, white phosphorous, chemical & nuclear weapons
** The United Nations Global Compact (UNGC) Principles cover human rights, labour, the environment, and anti-corruption. ECO Advisors use a specialist data provider to carry out media monitoring over the previous two years in order to identify companies who are engaged in activities within their operations that have likely violated a UNGC principle.
Tristan Elwell – Co-portfolio management, portfolio construction & risk oversight, compliance and operations supervision.
Josh Gennet – Co-portfolio management, ESG investment research process, business management.
Christian Dass – Trading, portfolio monitoring, liaison & reconciliation with Pictet operations team.
Victor Villar – IT development, cloud infrastructure, data processing and data science.
Roz Yazdan – ESG research, voting and engagement.
ECO Advisors’ conflicts policy requires that potential conflicts are identified, reported to the CCO, assessed for materiality and that measures are devised to mitigate conflicts. In the event of any uncertainty, ECO Advisors will seek the counsel of external compliance consultants (Optima). Furthermore, Optima performs regular (quarterly) reviews of ECO’s business operations with a particular focus on conflicts. Optima also provides ECO Advisors staff with regular training in order to ensure all staff are alert of the risk of potential conflicts.