Guillaume Detrait

Guillaume Detrait, President & Chief Risk Officer  [email protected]

As part of our new role as Core Supporter of SBAi, I recently participated in a panel discussion on ESG in Systematic Strategies at the SBAi Institutional Roundtable in Stockholm. For those following developments in the ESG / sustainable investing environment, it would be almost unheard of in the U.S. at this point to have an ESG discussion focused on systematic strategies. Institutional investors and regulators in Europe are really at the forefront of the evolution of the sector, and I was very pleased to hear the thoughts of my co-panelists from Swedbank Robur, Lynx Asset Management and SBAi.

The conversation covered a lot of ground from discussing the degree to which ESG strategies can truly be systematic; to ESG and commodities; to new regulations we might want or need to support the development of these strategies. I will not attempt to capture all of the ground we covered, but I think it’s worth sharing some of my own thoughts on the topic as there are no right answers about how to proceed and there is a long road ahead to get to a point where there are agreed upon standards and so forth. But I also think there are ways to offer investors multi-strategy, systematic ESG products that can meet some of the current unmet demand even before some of this work is done.

The main issue when it comes to systematic ESG measurement is the lack of standards across different providers. The industry would greatly benefit from standardization and, to some extent, from a more concentrated pool of providers which could act as reference (similarly to what exists in the credit rating space with three main agencies). And this was the focus of much of the discussion.

Currently, different ESG data vendors have different methodologies that lead to different scores. This lack of standards is a barrier to wider adoption.

The commodities conundrum

From a level-setting perspective, a large portion of ESG data should, in theory, be measurable systematically as it comes either in the form of cash flow reported through filings (which should therefore be dependable) or through textual information (company reports, news, social media, etc.). Today these factors can easily be analyzed through machine learning models (e.g. NLP). The analysis and inference of textual information is likely to become more and more widespread and efficient given the recent rise of large language models (LLMs) such as ChatGPT and Bard. A firm can do it itself, or get these data through vendors, such as MSCI, Sustainalytics, Arabesque and others.

ESG data can be incorporated into systematic systems the same way any other fundamental/macro data can be. The data should be able to be used either directly for alpha research or indirectly through allocation/filtering of tradeable asset and portfolio analysis.

However, when it comes to commodities trading and the trading of commodities futures, in particular, we still have a long way to go when it comes to developing an agreed upon standard to measure the effectiveness of these trades on an ESG basis, and this topic was a significant focus of our panel discussion. Why is it so difficult to develop an ESG approach for commodities?

Traditionally, ESG measurement refers to the asset itself (i.e., Apple or Exxon) and most people would argue that ESG measurement is therefore not directly applicable to commodities (these have no employees or factories, etc.). Having said that, we also must account for the fact that trading commodities has an indirect impact on supply and demand of the underlying commodity, (i.e., long speculation stimulates production) and that this therefore has an ESG impact as it relates to the production of that commodity. In addition, commodities are not equally spread across geographies and the geographic location of the particular commodity affects the ESG rating. For example, buying gas from Russia would result in a lower ESG score vs. buying gas from Canada due to Russia’s lower ESG score and production methods.

Some are trying to solve the commodities ESG conundrum by improving the quality of certification standards and ESG considerations through a dialogue with the exchanges. For example, can we have an S&P ESG futures with enough liquidity, or can we have commodities futures that meet certain emission standards, etc.?

The challenge for the evolution of the ESG marketplace and the further development of systematic ESG products that offer investors important portfolio diversification enhancements is that these types of discussions and certifications will likely take a long time, since we need to agree on standards, create these instruments and then generate enough liquidity to do these trades effectively.

Systematic ESG Solutions for today’s investor

Nevertheless, in the meantime there are still ways to incorporate systematic ESG into a portfolio that meets current unmet investor demand. By way of example, our ESG Advantage strategy is a SFDR article 8-compatible systematic product designed to offer investors diversification advantages.

To-date ESG funds have been concentrated in equity funds with a long bias, and often times discretionary stock picking, and have been therefore subject to the same systemic risk of passive equity funds. Our view is that we can offer a product that has the characteristics of an ESG equity offering that can be measurably assessed (although subject to the lack of standards issue described above), where poorly ESG ranked firms are screened out and while with better and/or improving ESG scores are getting more capital allocation. In addition, we apply a small portion of cash used in derivatives (these are also screened for ESG where possible) to mitigate and even profit from equity systemic risk. And everything is done in a systematic way (from data collection, to signal generation, to execution).

I look forward to continuing to work with our colleagues in the sector to reach commonly accepted standards for measuring the ESG impact of commodities. But let us not have perfection be the enemy of the good. It is still possible to offer today’s investor systematic ESG products that can advantage an investor’s portfolio, and I encourage the industry to continue to innovate these types of solutions as we work towards developing global standards.


  • Guillaume Detrait

    Guillaume oversees Welton’s operations and enterprise risk management, ensuring that all systems, resources, and people are in place to achieve the firm’s goals.

Welton Investment Partners