Beyond Article 9, is there a Regulation to Promote Real Sustainability?

Recent events have shown how anticipating forthcoming clarification on the application of a text that has been published since 2019 has created such confusion that many asset managers have had to reclassify a large number of their funds from Article 9 to Article 8. If the ultimate goal of a regulation is to provide a strong and credible message to the market to favour good behaviour, we can already affirm that the objective has failed with respect to SFDR.

Beyond this confusion, one must firstly observe that not only the industry but also regulators are making excessively ambitious use of Sustainable Finance Disclosure Regulation (SFDR) Articles 8 and 9, which, in the Level I text, were not created to establish labels – such labels fall under existing (e.g. Climate Transition Benchmarks (CTB)/Paris-Aligned Benchmarks (PAB) or possibly forthcoming (e.g. ESG benchmark) regulation – but simply to introduce differentiated transparency requirements for funds with different sustainability-related ambitions.

It is clear that the industry is always looking for labels, but when the texts are not designed to do this, the risk of confusion and imprecision is considerable and, along with it, the risk of greenwashing.

From that viewpoint, the European Supervisory Authorities' (ESAs) recent Q&A on the SFDR Delegated Regulation and the interpretations that are provided therein pose a problem.

The idea that benchmarking to an EU-PAB compliant index would be enough to qualify the objectives of a fund as being consistent with the objectives included in Article 9 of the SFDR regulation and as such would dispense the fund from "a detailed explanation of the way in which the pursuit of the efforts deployed to achieve the carbon emission reduction objective is covered with a view to achieving the long-term global warming objectives set out in the Paris agreement" (Art 9.3) creates a serious opportunity for greenwashing.

All of this is based on the misconception that tracking error, which is a financial indicator that measures the volatility of the distance between a fund and its benchmark, would provide an indication on compliance with the non-financial criteria or objectives contained in the benchmark.

In very concrete terms, a fund can have very limited tracking error relative to its benchmark yet have very different objectives and/or holdings. Focusing on the existence of a reference index and relying on tracking error to qualify or disqualify a fund as sustainable seems to us to create opportunities for misinformation whereas the very objective of the SFDR was to reduce information asymmetry and improve investor information.

To avoid additional confusion, and ultimately the decredibilisation not only of the SFDR text, but also of the CTB/PAB regulation, it would be good for the regulator to clarify the conditions for using the PAB benchmark, and for this reason the term "tracking" used by the European Securities and Markets Authority (ESMA) should be replaced by "physical replication" because only full passive replication may allow for compliance with the SFDR regulation.

Beyond the confusion in terms, on the very subject of the definition of what constitutes sustainable investments as per the SFDR, we see clearly that despite the introduction of transparency requirements in relation to a swathe of sustainability indicators, the regulator is now trying to substitute labels (in relation to holdings-based restrictive criteria) for the investor's judgment.

While this type of approach that confuses sustainable funds and sustainable assets is surely useful for qualifying thematic funds, it seems to us to be incompatible with the subject of climate alignment, which in the more ambitious forms supposes that a fund invest in companies that are not necessarily deep green but are essential to the functioning of the economy and have better climate performance than their peers, along with credible transition plans (e.g. decarbonisation of their core activities in line with science and/or repositioning towards green activities).

Ultimately, there is considerable risk that the regulator, through fear of greenwashing, organises a form of macro-greenwashing by promoting the underrepresentation of sectors that have a central role to play in the proper transition towards a low emissions and climate-resilient economy, as is already the case with the run-of-the-mill indices complying with the EU PAB criteria.

Indeed, these indices considerably underweight the electricity production sector while promoting products and services that reflect the necessary electrification of the economy.

It is surprising for the least that there has been no promotion of consistency between the consumption of electricity organised by sector reallocation and the activities of a climate-aligned benchmark, and the current or forecasted production of electricity financed by the same benchmark.

By proceeding by an accumulation of rules rather than thinking about the objectives and principles of regulation, the European Union may be failing to incentivise sustainable finance in the right way.

Financing the Energy Transition: What is the Role of Fossil Fuels Divestment?,
Scientific Beta white paper, November 2022
Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing,
Journal of Impact & ESG Investing, Summer 2022
A Critical Appraisal of Recent EU Regulatory Developments Pertaining to Climate Indices and Sustainability Disclosures for Passive Investment,
Scientific Beta white paper, December 2020

Scientific Beta Welcomes the NZAOA's Principles for Net-Zero-Aligned Benchmarks

The UN-convened Net-Zero Asset Owner Alliance (NZAOA) recently launched a call to action for asset owners and index providers for the development and uptake of Net-Zero-Aligned Benchmarks. NZAOA spells out 10 principles such indices should follow to underpin the alliance's goal of transitioning investment portfolios to net-zero greenhouse gas (GHG) emissions by 2050, consistent with a maximum temperature rise of 1.5°C above pre-industrial levels.

In the first part of this article, we show how Scientific Beta's Climate Impact Consistent (CIC) indices integrate these 10 principles. Indeed, the CIC indices are designed to maximise the climate-impact potential of an investment strategy and, in line with the commitment that NZAOA members make, they "emphasise GHG emissions reduction outcomes in the real economy". The NZAOA also points to some of the shortcomings of the European Union's climate benchmarks. Scientific Beta has previously voiced concerns about this regulation and concurs with the NZAOA's arguments.

In the second part of this article, we show how many indices that comply with the regulated Paris Aligned Benchmark (PAB) constraints fail to reflect some of the NZAOA's core benchmark principles.

How CIC Indices Align with the NZAOA's 10 Principles for Net-Zero-Aligned Benchmarks

1. Ensure Transparency in Methodology and Design

Transparency on index construction philosophy and rules have always been at the centre of Scientific Beta's indices. Our homepage provides documentation that describes in minute detail the index construction methodology, from the universe and calculation rules to the stock selection and weighting mechanisms.

We also, as recommended, assess our indices annually "to ensure they remain credible, relevant and appropriate". Scientific Beta's indices are the result of a rigorous R&D process. By nature, research is dynamic and we ensure that our clients benefit from ongoing developments by updating the index rules and data sources each year, in conjunction with the client, through a transparent and interactive process.

2. The Starting Point of Decarbonisation Should be set to "Today"

We offer two versions of the CIC indies, one that complies with PAB constraints and a standard version that better reflects Scientific Beta's house views. While the PAB version complies with the legal requirement that its carbon intensity should be 50% lower than its standard parent index from the outset, for standard CIC indices the annual 7% decarbonisation pathway does start at inception. At the outset we just verify that the CIC index is not more carbon intensive than its parent.

3. No Mechanical Exclusion of High Emitting Sectors (Except Thermal Coal) or Countries

We spelled out our position on fossil fuels divestment in a recent paper titled Financing the Energy Transition: What is the Role of Fossil Fuels Divestment? Except for thermal coal and tar sands, our position is that fossil fuel divestment policies should be discerning and escalating – not indiscriminate and immediate. The dual movement out of fossils and into renewables needs to be implemented in a coordinated, orderly manner. It's a transition, not a disruption.

Applying the PAB regulation's fossil fuels exclusion criteria will not help tackle climate change and could even be counterproductive: indeed, we show in that paper that PAB requirements exclude companies that represent almost 40% of global renewables-based electricity generation from large and mid-cap listed equity universes.

4. Net-Zero-Aligned Indices Should Correspond to Real-Economy Decarbonisation

The white paper presenting the CIC index philosophy and methodology shows how we have thought through the choice of metrics and portfolio construction methodology. Our aim is to encourage decarbonisation of the real economy. Issuer-level climate performance and decarbonisation, relative to the relevant sector, unambiguously determine a constituent's weight and its variation over time. Capital allocation thus not only influences the terms on which issuers may enjoy access to capital but also sends them clear signals about the importance of decarbonising.

This means that the CIC Indices are a tool in the hands of Net-Zero aligned investors wishing to maximise the impact of their engagement efforts: from the outset of the engagement, capital is allocated to each company in a manner consistent with the stated Net-Zero alignment commitment of the investor. An effective reward mechanism for companies is implemented whereby improved corporate climate alignment translates into higher index weights, i.e. into increased capital allocation. It is our view that synergies between portfolio construction and engagement must be at the core of any investment policy that seeks climate change impact.

5. Account for Difference in Speed of Decarbonisation Across Sectors and Geographies

For the CIC indices, a company's weight, i.e. the capital allocation it receives, does indeed depend on its past and planned decarbonisation efforts compared to its peers in the same sector. This ensures that the 7% annual decarbonisation pathway is implemented at the portfolio-level, while at the stock-level the differences in decarbonisation speeds between industries are accounted for. Moreover, we ensure that the capital allocation to sectors and regional blocks is in line with their market weights, thus avoiding macroeconomic biases and greenwashing that simply consists in underfunding carbon-intensive sectors or countries.

6. Ensure that Forward-Looking Indicators are a Key Input in the Decarbonisation Process

The assessment of a company's climate performance and efforts should indeed reflect both current and forward-looking aspects. In a transparent adjustment to each company's current performance, the CIC weighting scheme increases the weight of companies that have decarbonisation plans approved by the Science Based Targets initiative. The adjustment is higher for companies with more ambitious targets.

7. Every Index Universe Needs to Report on Climate Key Performance Indicators

Scientific Beta provides an in-depth climate and ESG reporting for all its indices, not only for its climate and ESG indices. In addition to exhaustive climate impact and climate risk key performance indicators, the reporting includes greenwashing metrics that we believe are key to analysing different climate investing strategies, as we will outline in more details in the second section of this paper.

In line with the recommendation that "asset owners should then be able to easily customise standard indices as needed" we offer extensive customisation capabilities to our clients. In effect, the vast majority of Scientific Beta's climate and ESG indices are customised to respect the specific requirements of our clients, which are mostly pension funds.

8. Lack of Data Must be Correctly Addressed

We fully agree that stock weightings should differ between assessments based on company self-reported data and those for which they need to be estimated, lest "issuers can improve their standing by not providing the data". The CIC weighting rules do therefore include – as recommended – a "penalising mechanism for those issuers that fail to provide their data". This mechanism is severe, as companies in the most carbon intensive sectors may be excluded for failing to report their Scope 1 and 2 emissions, while in other sectors they are downweighted.

9. Key Metrics Should be Comparable to the Parent Index and Tracking Should be Practical

As highlighted above, the CIC indices weight stocks by comparing their climate performance with that of their peers in the same sector and they avoid macroeconomic biases in their capital allocations to different sectors and regional blocks. The sector-relative stock weighting scheme, which is entirely based on climate metrics and not diluted by other considerations, maximises the incentive of companies to do better than their peers on the climate front. At the same time, the macro-consistent allocation across sectors and regions results in moderate levels of tracking error, of about 2%.

Ensuring low transaction costs through high levels of investability has been a key feature of all Scientific Beta indices. It is a critical consideration since the indices we produce are not plain vanilla cap-weighted indices. We have developed a transparent methodology for estimating these costs, as outlined in the following paper. Based on these calculations we estimate, for example, the annual average transaction costs for replicating the SciBeta Developed Climate Impact Consistent index to be a mere 2 basis points.

When it comes to the recommendation that "To ensure a broad implementation, key metrics such as turnover (…) should be comparable to the parent index", this is neither necessary for low transaction costs, nor possible for a credible Net-Zero-Aligned Benchmark, if this parent index is taken to be a "broad traditional-market index". Indeed, broad cap-weighted indices have an incompressible level of turnover, simply resulting from corporate actions, IPOs/bankruptcies and minimum liquidity requirements. There is no turnover arising from deliberate investor choices, which is why tracking them is often called passive investing.

Unless the investor's current portfolio is already a Net-Zero-Aligned portfolio and unless the relative climate performances of issuers never change, shifting to a Net-Zero-Aligned Benchmark will incur turnover. This is not a design flaw, but how they reach their objective. Net-Zero-Aligned strategies are an active investment policy that must "emphasise GHG emissions reduction outcomes in the real economy". They cannot be a passive strategy that statically accepts the world as it is.

10. The Benchmark Universes Should Incorporate Metrics for a Just Transition, Acknowledging that Appropriate Metrics are Still to be Refined

The Scientific Beta Core ESG Filter is applied to all CIC indices. It reflects the most consensus-based screening criteria applied by investors. It implements norms-based and negative screens which are grounded in global norms, including in the social dimension. Exclusions promoted by the Core ESG Filter send clear signals to companies and other stakeholders. Unlike best-in-class screening which is used in ESG integration strategies that mix ESG considerations, such as ESG scores, with traditional financial inputs in the portfolio construction process, the Core ESG Filter strictly guarantees the exclusion of companies that are known to violate ethical principles or minimum standards, irrespective of their overall ESG ratings or financial attractiveness.

The NZAOA acknowledges that appropriate metrics pertaining to a just climate transition still need to be refined. In that regard, it will be important to avoid repeating some of the failures of traditional ESG scores, whose use can have perverse effects as we outlined in the following white paper.

How Paris Aligned Benchmarks Fail to Integrate the NZAOA Principles

Contradiction with Principle 3

We already mentioned above how the PAB fossil fuel screens are in contradiction with Principle 3 that there should be "No mechanical exclusion of high emitting sectors (except thermal coal)". The regulation may at first glance seem to make a relevant distinction between the three main types of fossil fuels, coal, oil and gas¹, as the exclusion thresholds of 1%, 10% and 50% of revenues respectively indicate a consistent hierarchy. However, in practice, all companies in the fossil fuels sector in the Scientific Beta Global Universe of mid and large cap companies end up being excluded from PAB compliant indices.

The PAB requirements include another fossil-related exclusion, namely of companies "that derive 50% or more of their revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh". As a result, electric utilities relying on fossil fuels for most of their activity are to be shunned.

All in all, as shown in Exhibit 1 below, the PAB fossil screens lead to the withdrawal of funding for companies representing about 35.8% of the renewable electricity generated in the global listed equity universe. This tightening of funding increases the cost of capital for these companies and hampers their ability to pursue further investments in renewable energies.

Exhibit 1: Share of Total Renewable Electricity Revenues Generated by PAB-Excluded Companies

Share of Renewable Eectricity Revenues Generated by Companies Excluded by the Different PAB Fossil Fuels Exclusion Criteria	Developed Markets	Emerging Markets	Global Markets
No more than 1% of revenues from coal, 10% from oil, 50% from gas	7.4%	38.6%	14.1%
No more than 50% of revenues from electricity generation with a GHG intensity of more than 100 g CO2 e/kWh	29.3%	29.3%	29.3%
All four of the above PAB fossil fuels screening criteria (screening criteria may overlap for the same company)	32.8%	46.6%	35.8%

Scientific Beta universes as of the end of June 2022. Renewable electricity revenues sourced from ISS ESG. The shares are computed as the sum of revenues from renewable electricity generated by excluded companies, divided by the same revenues for all companies in the respective Scientific Beta universes. Revenues are trailing 12 months for the period ending 31 March 2022.

Contradiction with Principle 4

While such counterproductive effects are a direct consequence of the fossil-screening requirements of the PAB regulation, these requirements also allow for further greenwashing. In particular, many PAB compliant indices fail to reflect the NZAOA's Principle 4 that "Net-zero-aligned indices should correspond to real-economy decarbonisation".

The shift to an economy compatible with no more than 1.5°C warming will require massive investments, in particular in low-carbon electricity generation and storage and transmission infrastructure, as shown in the International Energy Agency's net zero projections in Exhibit 2 (see IEA (2021). Net Zero by 2050 A Roadmap for the Global Energy Sector, May).

Exhibit 2: Clean Energy Investment in the Net Zero Pathway, USD trillion

Source: IEA (2021). Net Zero by 2050 A Roadmap for the Global Energy Sector, May.

However, the real-economy outcome of many PAB-compliant indices is the exact opposite: less financing of electric utilities, not more. In a paper on detecting greenwashing in climate investing strategies, we show that typical methodologies used to construct climate indices lead to a drastic reduction in the capital allocation to the electric utilities sector. As demonstrated in Exhibit 3, whether the portfolios are built by tilting (over and underweighting stocks, relative to a standard cap-weighted benchmark, based on their carbon intensity measures) or by optimisation (using a portfolio optimiser to achieve an average carbon intensity reduction while minimising tracking error with respect to a standard cap-weighted benchmark), the outcome is a severe reduction in the weighting of electric utilities. Moreover, imposing the greenwashing constraint of the PAB, which prohibits the underweighting of high climate impact sectors in aggregate – as opposed to sector by sector – has almost no effect on this problem.

Exhibit 3: Representation of the Electricity Sector by Strategy Type

	Tilting Strategies	Optimisation Strategies
Unconstrained Strategies
Electricity Sector Absolute Active Weight Electricity Sector Relative Active Weight	-2.2% -81.0%	-2.5% -90.5%
Strategies with Aggregate Constraint on High Climate Impact Sectors
Electricity Sector Absolute Active Weight Electricity Sector Relative Active Weight	-2.2% -79.0%	-2.4% -89.4%

We report results for each strategy type, averaging across the 8 different climate scores that we maintain. Our results thus provide a complete picture across the 8 climate metrics. We note that results align very closely across the 8 metrics so that averaging does not hide relevant information. We assess impact consistency measures once a year in June from 2011 to 2020 and report the average value. We thus provide a view on impact consistency observed on average over one decade. Electricity sector is from the Scientific Beta climate impact sector classification. Note: Index products may deviate from stylised strategies in important ways. Results derived for stylised strategies may not be applicable to index products, in particular in the case where index products employ additional constraints or rules which are not accounted for in the stylised strategies.

• 
  • ¹Cf. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32020R1818. "Administrators of EU Paris-aligned Benchmarks shall exclude all of the following companies from those benchmarks: Article 12 (d) companies that derive 1 % or more of their revenues from exploration, mining, extraction, distribution or refining of hard coal and lignite; (e) companies that derive 10 % or more of their revenues from the exploration, extraction, istribution or refining of oil fuels; (f ) companies that derive 50 % or more of their revenues from the exploration, extraction, manufacturing or distribution of gaseous fuels".

Scientific Beta welcomes the NZAOA's Principles for Net-Zero-Aligned Benchmarks,
Scientific Beta white paper, December 2022
Financing the Energy Transition: What is the Role of Fossil Fuels Divestment?,
Scientific Beta white paper, November 2022
A Critical Appraisal of Recent EU Regulatory Developments Pertaining to Climate Indices and Sustainability Disclosures for Passive Investment,
Scientific Beta white paper, December 2020

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Performance of Scientific Beta's Smart Beta Factor Offering in 2022

Scientific Beta's Multi-Beta Multi-Strategy indices provide exposure to the six consensus rewarded factors, namely Mid-Cap, Value, High Momentum, Low Volatility, High Profitability, and Low Investment. Over the long-term, they achieve a superior risk-adjusted performance than broad cap-weighted benchmarks, thanks to the diversification of unrewarded risks through the use of a multi-strategy weighting scheme and good factor exposure quality, which allows the factor rewards to be captured properly. In particular, the use of the high-factor-intensity filter, which accounts for negative factor interaction, enables strong factor intensity for each single-factor sleeve to be promoted by reducing negative exposure to secondary factor tilts. The equal-weight allocation between individual factor sleeves produces indices with well-balanced exposure to all six rewarded factors or factor deconcentration.

Scientific Beta's multi-factor indices are offered with different risk control options since factor investing comes with implicit or hidden risks. Indeed, investors can control for sector, market beta or volatility deviations to fit with their investment objectives. For instance, an investor who has a tracking error constraint can decide to use our sector neutral risk control option to reduce sector deviations of our standard multi-factor index and hence reduce tracking error compared to the standard version. But this will come at the cost of a lower factor intensity and lower potential of long-term risk-adjusted performance.

Finally, we offer an ESG and Low Carbon option designed to meet core ESG standards and to support the transition towards a low carbon economy. This is done without altering the factor exposure quality of our multi-factor indices, while materially reducing index exposure to the potential risks of this transition.

Scientific Beta's Multi-Factor Indices Outperformed in 2022 in the US and Global Regions

Scientific Beta's multi-factor indices in the US and Global regions outperformed broad cap-weighted benchmarks, on average, despite the strong negative performance of equities. This outperformance was particularly strong in the US universe, with the standard version of our Multi-Beta Multi-Strategy (MBMS) index outperforming the cap-weighted benchmark by 6.53%, while the ESG & Low Carbon version outperformed by 4.52%. The sector neutral version, which reduces sector deviations relative to the cap-weighted, outperformed by 3.65%. The market beta adjusted version, which corrects the defensiveness of the standard version of our multi-factor indices, outperformed by 3.41% and was penalised compared to the standard version by the negative performance of the market. The historical volatility adjusted version, which reduces or increases exposure to the market risk to stabilise the volatility close to its historical level outperformed by 4.40%, while providing a reduction in volatility compared to the broad cap-weighted benchmark of -21% instead of -12% for the standard version.

Conversely, performance in the Developed ex-US region was negative, except for the sector neutral version, which outperformed by 0.28%. The standard version of the multi-factor index underperformed slightly by -0.93%, while the ESG & Low Carbon version underperformed by -2.75%. The market beta version underperformed by -1.70%, penalised by the negative performance of the market. Finally, the historical volatility adjusted version underperformed by -6.84%, impacted by the dynamic component to stabilise volatility, which led the index being underexposed in some market bounce backs.

2022 (RI/USD)	Broad Cap-Weighted	iHFI Multi-Beta Multi Strategy 6-Factor EW
		Standard	Standard + ESG & Low Carbon	Sector Neutral	Market Beta Adjusted	Historical Volatility Adjusted
United States
Ann. Returns	-18.76%	-12.25%	-14.23%	-15.10%	-15.34%	-14.35%
Ann. Volatility	24.45%	21.49%	21.88%	22.86%	25.45%	19.40%
Sharpe Ratio	n/r	n/r	n/r	n/r	n/r	n/r
Max. Drawdown	25.1%	21.7%	23.5%	23.9%	25.2%	22.4%
Ann. Rel. Returns	-	6.50%	4.52%	3.65%	3.41%	4.40%
Ann. Tracking Error	-	5.57%	4.99%	4.06%	4.58%	8.52%
Information Ratio	-	1.17	0.91	0.90	0.74	0.52
Developed ex-US
Ann. Returns	-13.52%	-14.44%	-16.27%	-13.23%	-15.22%	-20.36%
Ann. Volatility	19.64%	18.90%	18.82%	18.74%	20.44%	16.65%
Sharpe Ratio	n/r	n/r	n/r	n/r	n/r	n/r
Max. Drawdown	27.2%	27.8%	28.8%	26.4%	29.5%	31.1%
Ann. Rel. Returns	-	-0.93%	-2.75%	0.28%	-1.70%	-6.84%
Ann. Tracking Error	-	2.25%	2.52%	2.22%	2.34%	5.17%
Information Ratio	-	n/r	n/r	0.13	n/r	n/r
Global
Ann. Returns	-17.27%	-12.81%	-14.51%	-14.55%	-15.16%	-16.42%
Ann. Volatility	19.46%	17.36%	17.52%	18.19%	20.10%	15.52%
Sharpe Ratio	n/r	n/r	n/r	n/r	n/r	n/r
Max. Drawdown	25.7%	22.9%	24.3%	24.1%	25.9%	25.9%
Ann. Rel. Returns	-	4.46%	2.76%	2.72%	2.11%	0.85%
Ann. Tracking Error	-	3.91%	3.56%	2.85%	3.22%	6.67%
Information Ratio	-	1.14	0.78	0.95	0.66	0.13

Statistics are based on daily USD total returns from 31-Dec-2021 to 31-Dec-2022. All statistics are annualised. The indices used are the SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW (Standard), SciBeta Low Carbon iHFI Multi-Beta Multi-Strategy 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy (Sector Neutral) 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Market Beta Adjusted (Overlay), and SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Hist-Vol Adjusted in the US, Developed ex-US and Global regions. Broad cap-weighted benchmarks are SciBeta Cap-Weighted indices in the US, Developed ex-US and Global regions.

To have a better understanding of the drivers of performance of our multi-factor indices, we will analyse in the following sections the three main sources of performance of factor strategies:

1. Performance of rewarded factors
2. Impact of the diversification of idiosyncratic risks
3. Impact of non-factor risks

Rewarded Factors had Positive Average Performance Across all Regions

The six-consensus rewarded L/S factors had a positive average performance in 2022 across all regions as depicted in the table below, with the Momentum, Low Investment and Value factors delivering the strongest performance. The Momentum factor had a positive performance of 19.9% in the US which is five times higher than its average 1-year rolling annual return over the long-term (40-year period) and almost recovered from its 2021 dive of -22.2%. The Low Investment factor had a positive performance of close to 15% across the three regions analysed. Its performance in the Global region is even above the 5% best rolling annual return observed since 2022. Similarly, the Value factor had a positive performance of 8.4%, 17.3% and 11.3% in the US, Developed ex-US and Global regions. In the US, these three factors benefited from their positive average allocation to the Energy sector which outperformed the US broad cap-weighted benchmark by 84.5% and their negative average allocation to the Consumer Cyclical sector, which underperformed by -17.5%. The Momentum factor also benefited from a negative average allocation to the Technology sector, which underperformed by -14.0%. Conversely, the High Profitability factor had negative performance across all regions. We underscore that compared to historical standards, the 2022 performance across the three regions was below the worst 5% 1-year rolling annual return and hence was exceptionally negative. This performance can be explained by the factor's positive average allocation to the Cyclical Consumer sector and negative average allocation to the Energy sector. Finally, we note that the performance of L/S factors was more mixed in the Developed ex-US universe. Indeed, while in the US and Global regions, five out of six factors had positive performance in 2022 that was above their long-term average, only three factors had positive performance in the Developed ex-US region, namely Value, Momentum and Low Investment, while Size, Low Volatility and High Profitability had negative performances of -7.3%, -9.5% and -12.7% respectively. Nonetheless, the average performance of L/S factors was positive by 1.4% in the Developed ex-US region. Similarly, the US and Global average performance was positive at 6.9% and 4.8% respectively, which is slightly above their long-term average.

Region	Statistics	SMB	HML	MOM	LVOL	HPRO	LINV	Avg
United States	2022	3.5%	8.4%	19.9%	4.3%	-10.1%	15.4%	6.9%
	Avg. Rolling Annual Return	8.8%	-1.7%	3.9%	8.5%	3.8%	4.1%	4.1%
	Worst 5% Rolling Return	-22.0%	-20.5%	-20.9%	-17.4%	-9.1%	-9.2%	-3.9%
	Best 5% Rolling Return	53.8%	14.4%	27.9%	36.9%	22.5%	21.3%	18.7%
Developed ex-US	2022	-7.3%	17.3%	6.4%	-9.5%	-12.7%	14.3%	1.4%
	Avg. Rolling Annual Return	8.80%	3.00%	5.60%	6.70%	3.4%	1.6%	4.8%
	Worst 5% Rolling Return	-25.5%	-16.9%	-16.8%	-12.1%	-9.4%	-7.1%	-14.7%
	Best 5% Rolling Return	56.4%	23.3%	31.1%	31.6%	16.8%	14.8%	29.0%
Global	2022	0.9%	11.3%	14.0%	-0.7%	-11.3%	14.8%	4.8%
	Avg. Rolling Annual Return	4.2%	0.2%	3.8%	7.3%	3.8%	0.4%	3.1%
	Worst 5% Rolling Return	-10.6%	-16.0%	-13.0%	-8.3%	-4.3%	-9.6%	-2.6%
	Best 5% Rolling Return	21.0%	14.6%	18.7%	23.6%	13.1%	6.4%	8.5%

Factors are long/short factors market beta neutralised (ex-post on a quarterly basis). Rolling analysis uses EDHEC-Risk Long-Term data from 1981 to 2021 for US, 1984 to 2021 for Developed Ex-US and from 2002 for the global universe. All statistics are calculated on a rolling basis over a one-quarter window size, with a one-week step size. Average rolling quarterly return denotes the mean of the quarterly rolling return time-series of each factor. Worst (Best) 5% rolling return is the fifth (ninety fifth) percentile of the quarterly rolling returns time-series of each factor. The Market factor is the difference in return of the cap-weighted index of all stocks that constitute the index portfolio and the risk-free rate. The Size factor is the return series of an equal-weighted portfolio that is long small market-cap stocks and short the top 30% stocks (large market-cap stocks) sorted on market capitalisation in descending order. The Value factor is the return series of an equal-weighted portfolio that is long for the top 30% stocks (value stocks) and short for the bottom 30% stocks (growth stocks) sorted on book-to-market value in descending order. The Momentum factor is the return series of an equal-weighted portfolio that is long the winner stocks and short the loser stocks. The winner stocks (inversely the loser stocks) are defined as the top 30% (inversely the bottom 30%) of stocks, sorted on the past 104 weeks' compounded returns excluding the most recent month, in descending order. The Volatility factor is the return series of an equal-weighted portfolio that is long the bottom 30% stocks (low volatility stocks) and short the top 30% stocks (high volatility stocks) sorted on past volatility in descending order. The Profitability factor is the return series of an equal-weighted portfolio that is long the top 30% stocks (high profitability stocks) and short the bottom 30% stocks (low profitability stocks) sorted on gross profitability in descending order. The Investment factor is the return series of an equal-weighted portfolio that is long the bottom 30% stocks (low investment stocks) and short the top 30% stocks (high investment stocks) sorted on two-year asset growth in descending order. All factors considered are market beta neutralised quarterly using ex-post CAPM beta over the quarter.

Scientific Beta's multi-factor indices offer strong exposure to the six well-rewarded risk factors but also good factor deconcentration, hence they benefited from the average positive performance of factors. Value and Momentum factors were the main contributors to the performance of the standard multi-factor index with 2.1% for both factors in the US region, 3.7% and 0.3% in Developed ex-US and 2.6% and 1.3% in Global. Conversely, the High Profitability factor had a negative contribution of -1.7% in the US, -2.4% in Developed ex-US and -2.0% in Global. In the Developed ex-US region, the Low Volatility factor had a negative contribution of -1.3%. The ESG & Low Carbon version of our standard index in the US region was penalised by a higher factor tilt to High Profitability and lower exposure to Momentum. Therefore, the factor contribution was lower than the standard version. Overall, for the standard version of our multi-factor index, the total factor performance contribution was +3.5% in the US, -0.1% in Developed ex-US and +2.4% in the Global region.

2022 (RI/USD)	iHFI Multi-Beta Multi Strategy 6-Factor EW
	Standard		Standard + ESG & Low Carbon		Sector Neutral		Market Beta Adjusted		Historical Volatility Adjusted
	Expo	Ctrb	Expo	Ctrb	Expo	Ctrb	Expo	Ctrb	Expo	Ctrb
United States
SMB	0.18	0.6%	0.18	0.6%	0.15	0.5%	0.18	0.6%	0.19	0.7%
HML	0.24	2.1%	0.25	2.1%	0.23	1.9%	0.25	2.1%	0.12	1.0%
MOM	0.10	2.1%	0.07	1.4%	0.08	1.6%	0.10	2.0%	0.07	1.3%
LVOL	0.08	0.4%	0.08	0.3%	0.01	0.0%	0.09	0.4%	0.05	0.2%
HPRO	0.17	-1.7%	0.23	-2.3%	0.22	-2.2%	0.16	-1.6%	0.23	-2.4%
LINV	0.00	0.1%	-0.02	-0.3%	0.02	0.3%	0.00	0.0%	0.15	2.3%
Factor Intensity	0.79		0.79		0.71		0.79		0.80
Factor Deconcentration	4.45		3.93		3.84		4.39		4.85
Factor Exposure Quality	3.50		3.11		2.72		3.45		3.91
Developed ex-US
SMB	0.12	-0.9%	0.11	-0.8%	0.13	-0.9%	0.11	-0.9%	0.16	-1.1%
HML	0.21	3.7%	0.15	2.6%	0.15	2.6%	0.22	2.7%	0.16	2.8%
MOM	0.05	0.3%	-0.02	-0.1%	0.09	0.6%	0.05	0.6%	0.06	0.4%
LVOL	0.14	-1.3%	0.19	-1.8%	0.06	-0.6%	0.13	-0.6%	0.12	-1.2%
HPRO	0.19	-2.4%	0.14	-1.8%	0.14	-1.8%	0.19	-1.8%	0.03	-0.4%
LINV	0.01	0.2%	-0.02	-0.4%	0.04	0.5%	0.01	0.5%	-0.07	-1.0%
Factor Intensity	0.72		0.55		0.61		0.72		0.46
Factor Deconcentration	4.44		3.23		5.14		4.36		2.86
Factor Exposure Quality	3.19		1.79		3.14		3.13		1.32
Global
SMB	0.20	0.2%	0.20	0.2%	0.16	0.2%	0.20	0.2%	0.24	0.2%
HML	0.23	2.6%	0.20	2.3%	0.20	2.2%	0.24	2.7%	0.17	1.9%
MOM	0.09	1.3%	0.04	0.6%	0.08	1.1%	0.09	1.3%	0.06	0.9%
LVOL	0.11	-0.1%	0.12	-0.1%	0.03	0.0%	0.11	-0.1%	0.08	-0.1%
HPRO	0.17	-2.0%	0.21	-2.3%	0.21	-2.4%	0.17	-1.9%	0.24	-2.8%
LINV	0.03	0.4%	0.01	0.2%	0.03	0.5%	0.02	0.3%	0.14	2.0%
Factor Intensity	0.82		0.78		0.72		0.82		0.94
Factor Deconcentration	4.79		4.37		4.31		4.71		5.00
Factor Exposure Quality	3.95		3.41		3.09		3.88		4.73

Statistics are based on daily USD total returns from 31-Dec-2021 to 31-Dec-2022. We show factor exposures (Expo) and the factor performance contribution (Ctrb), which is the product between the exposure to the long/short factor and the performance of the factor. Exposures are measured via regressions based on daily returns. Factors are long/short factors market beta neutralised (ex-post on a quarterly basis) as described in the footnote of the previous table. Factor intensity is the sum of non-market factor exposures. Factor deconcentration is the inverse of the sum of relative betas. Factor exposure quality is the product of factor intensity and factor deconcentration. Bold values are statistically significant with standard errors corrected for HAC. The indices used are the SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW (Standard), SciBeta Low Carbon iHFI Multi-Beta Multi-Strategy 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy (Sector Neutral) 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Market Beta Adjusted (Overlay), and SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Hist-Vol Adjusted in the US, Developed ex-US and Global regions.

Diversification of Idiosyncratic Risks

Diversification of idiosyncratic risks is a key pillar of Scientific Beta's investment philosophy. Our multi-factor indices use a diversified weighting scheme that enables idiosyncratic risks, which are unrewarded, to be diversified away and consequently enables factor rewards to be captured efficiently. Such diversified weighting schemes are more effective when the performance of broad cap-weighted benchmarks is not concentrated in the largest companies, which is the case over the long-term. In 2022, the top 5% largest capitalisation companies underperformed the cap-Weighted index by -7.1% in the US region and by -3.6% in Global, while they outperformed by 2.6% in the Developed ex-US region.

Largest 5% Stocks	US	Developed ex-US	Global
2022	-7.1%	2.6%	-3.6%
Since Inception (Annualised)	-1.3%	-1.5%	-0.4%

The table reports relative performance of the top 5% stocks based on their free-float market capitalisation relative to their corresponding broad cap-weighted index over 2022 and since inception (21-Jun-2002). Returns since inception are annualised. The broad cap-weighted benchmarks are SciBeta Cap-Weighted indices in the US, Developed ex-US and Global regions.

Consequently, in the US and Global regions, diversification had a positive impact on our standard multi-factor indices, as we can see in the table below. Conversely, in the Developed ex-US region, concentration of performance had a negative impact since diversification was less effective given the concentration of performance in the largest 5% companies.

2022	US	Developed ex-US	Global
Impact of Largest 5% Stocks	2.4%	-0.6%	0.6%

The table reports the impact of the concentration of performance of the largest 5% companies on SciBeta multi-factor indices. In the first step, we run a 7-factor regression with the same long/short factors as described in the table above to extract residual returns. In the second, we build a long/short factor where the long branch is the largest 5% companies and the short branch is the broad cap-weighted index. Finally, we regress residual returns on the long/short factor calculated in the second step to gain exposure to this long/short factor. The impact is calculated as the exposure multiplied by the performance of the long/short factor.

Non-Factor Risks – Market Beta Gap

Market beta drives much of the performance and risk of multi-factor indices. The consequences of deviations from market beta neutrality with respect to the cap-weighted benchmark, namely a market beta different than one, can have an important impact on the performance of multi-factor strategies. The table below displays the average market beta gap over 2022 of our standard multi-factor indices in the US, Developed ex-US and Global regions. We observe that the market beta gap was negative across all regions, meaning that they were more defensive than the cap-weighted benchmark. Consequently, they benefited from the negative market performance, and the market beta gap had a positive impact on the performance of our standard multi-factor index of 2.80% in the US, 2.57% in Global and 1.14% in Developed ex-US.

2022	US	Developed ex-US	Global
Average Market Beta Gap	-0.14	-0.05	-0.12
Impact of Market Beta Gap	2.80%	1.14%	2.57%

The table reports the average market beta gap which is estimated via a Kalman filter. It is computed as the daily average of the market beta gap across 2022. The impact of the market beta gap is computed as the daily market beta gap multiplied by the daily performance of the market factor minus the risk-free rate. The analysis is conducted on standard multi-factor indices, namely SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW in the US, Developed ex-US and Global regions.

Non-Factor Risks – Sector Deviations

In long-only investment, there is no orthogonality between factors and sectors. Factors can therefore lead to important sector biases relative to the cap-weighted benchmark, which can impact positively or negatively the short-term relative performance of multi-factor indices. In 2022, we underline that sectors had a positive contribution to the performance in the US and Global regions by 4.6% and 2.8% respectively. The Technology sector had the strongest contribution in both the US and Global regions. In Developed ex-US, sectors had a slightly negative contribution of -0.4%, led by the negative relative allocation to the Energy sector.

Sectors	US		Developed ex-US		Global
	Rel. Alloc.	Contribution	Rel. Alloc.	Contribution	Rel. Alloc.	Contribution
Energy	2.4%	1.1%	-1.2%	-0.5%	1.1%	0.2%
Basic Materials	0.1%	0.0%	4.2%	0.2%	1.4%	0.1%
Industrials	-0.6%	-0.1%	-0.8%	0.0%	-0.5%	-0.1%
Cyclical Consumer	-2.0%	0.3%	-1.5%	0.1%	-1.6%	0.2%
Non-Cyclical Consumer	3.5%	0.7%	3.2%	0.1%	3.7%	0.5%
Financials	2.8%	0.1%	-1.8%	-0.1%	1.1%	0.1%
Healthcare	1.1%	0.2%	-3.8%	-0.1%	-0.3%	0.0%
Technology	-12.0%	1.9%	1.0%	0.0%	-8.6%	1.5%
Telecoms	0.8%	0.0%	-0.8%	-0.1%	0.5%	0.0%
Utilities	4.0%	0.5%	1.5%	0.0%	3.2%	0.3%
Total	0.0%	4.6%	0.0%	-0.4%	0.0%	2.8%

The table reports sector performance attribution in 2022 based on Menchero multi-period attribution methodology. The performance attribution is done on standard multi-factor indices, namely SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW in US, Developed ex-US and Global regions. The broad cap-weighted benchmarks are the SciBeta Cap-Weighted indices in the US, Developed ex-US and Global regions and are used to compute relative sector allocation.

Scientific Beta's Multi-Factor Indices have Good Factor Quality and are Well Positioned to Capture Factor Rewards

Scientific Beta flagship multi-factor indices outperformed in 2022 on US and Global regions and all three drivers of the performance of factor strategies had a positive contribution, with the strongest being the performance of rewarded factors, followed by the market beta gap. On Developed Ex-US, it is almost the opposite, since only the market beta gap had a positive impact on the performance. Indeed, the factor contribution was close to flat, because of mixed performance of rewarded factors, the concentration of performance in the largest companies played against diversified factor strategies and sector risks had a negative contribution. Relative to competitors, our US standard multi-factor index outperformance was above the average of competitors and below on Developed Ex-US. Finally, we see that on both regions, over the last 15- years our multi-factor strategies had better factor intensity and deconcentration than the average competitors and hence a much better factor exposure quality. Consequently, Scientific Beta multi-factor indices have a better capture of factor rewards as seen by the much higher factor contribution than competitors, which highlights the benefits of our investment philosophy and index design.

	iHFI Multi-Beta Multi Strategy 6-Factor EW
	Standard	Sector Neutral	Market Beta Adjusted	Historical Volatility Adjusted	Average Competitors
Relative Returns in 2022
United States	6.50%	3.65%	3.41%	4.40%	6.04%
Developed ex-US	-0.93%	0.28%	-1.70%	-6.84%	-0.01%
United States – Last 15 Years
Factor Contribution	1.09%	0.29%	1.11%	1.05%	0.31%
Factor Intensity	0.61	0.46	0.62	0.57	0.51
Factor Deconcentration	5.34	5.06	5.43	4.82	3.60
Factor Exp. Quality	3.25	2.34	3.37	2.72	1.90
Developed ex-US – Last 15 Years
Factor Contribution	2.21%	1.87%	2.23%	2.27%	1.15%
Factor Intensity	0.81	0.64	0.82	0.80	0.38
Factor Deconcentration	5.46	5.75	5.50	5.83	3.35
Factor Exp. Quality	4.44	3.69	4.49	4.69	1.51

The analysis is based on daily USD total returns from 31-Dec-2007 to 31-Dec-2022 in the SciBeta United States and Developed Ex-US universes. All statistics are annualised. The indices used are the SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW (Standard), SciBeta Low Carbon iHFI Multi-Beta Multi-Strategy 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy (Sector Neutral) 6-Factor EW, SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Market Beta Adjusted (Overlay), and the SciBeta iHFI Multi-Beta Multi-Strategy 6-Factor EW Hist-Vol Adjusted on the US and Developed Ex-US regions. Broad Cap-Weighted benchmarks are SciBeta Cap-Weighted indices on US and Developed Ex-US regions. Competitors’ indices in the US universe are the MSCI USA Diversified Multi-Factor index, the MSCI USA Factor Mix, the JPMorgan Diversified Factor US, the S&P GIVI US, the RAFI USA Multi-Factor index, the RAFI Dynamic Multi-Factor US and the Russell 1000 Comprehensive Factor index. Competitors’ indices in the Developed Ex-US universe are the FTSE Developed ex US Comprehensive Factor, the JP Morgan Diversified Factor International, the MSCI World ex USA Diversified Multi-Factor, the S&P GIVI Developed Ex-US, the RAFI Developed ex US Multi-Factor and the RAFI Developed ex US Dynamic Multi-Factor.

A Review of Equity Factor Performance in 2022,
Scientific Beta forthcoming webinar, 2 March, 2023

Scientific Beta Now Serving the Australian and New Zealand Markets

In September 2022, Scientific Beta announced its expansion into Australia and New Zealand, opening offices in Melbourne and Sydney. In this interview, Susan Rodgers, Business Development Director, and Mike Aked, Senior Investment Specialist, from Scientific Beta's ANZ team, present Scientific Beta's offering and activities in the region and discuss future opportunities in the market.

What is the outlook for Scientific Beta in the institutional investment market in the ANZ region?

The Australia and New Zealand institutional investment market is dominated by the large Superannuation funds (the Supers), with over A$3 trillion (APRA statistics) in assets. After a proliferation of funds, pressure from the regulator and a desire for lower fees has resulted in a flurry of fund mergers over the last 5 years. Currently, over half of the assets are managed by the largest 10 funds.

The introduction of new government legislation to strictly benchmark superannuation funds over an 8-year period has renewed their focus on the optimal use of active risk in their portfolios. Additionally, the Australian Government and the regulators have been slow to act on ESG, and Carbon in particular. Luckily, the investment industry has stepped into the breach implementing their own targets.

The result is heightened competitions between the Supers, both with respect to performance and responsibility, creating a demand for investment solutions that can meet these goals. Bespoke solutions that can simultaneously address ESG concerns, generate alpha, and manage risk relative to a benchmark, will be well positioned for the transformation occurring in the Australian and New Zealand institutional landscape. Scientific Beta is well positioned to enter this market as a bespoke solution provider with factor and ESG experience tested across Europe and the US.

What, if any, are the specificities of factor investing in this region?

The Australian and New Zealand equity market is not overly diversified, and it has been a struggle for off-shore quantitative approaches to penetrate the local market. Quantitative investment approaches historically have been either benchmark-agnostic or over optimised to be successful. As a result, traditional active management, and particular fundamental value management, has maintained a significant following.

That said, the complexities of our local market which is both overconcentrated at the security and sector levels, requires an additional appreciation of the science of factor investing than earlier market entrants have delivered. Luckily, Scientific Beta has continued to invest and deliver research-driven evolutions of Quantitative Factor investing. Our approach, which merges the discipline of academic rigour and research with our long experience in real world investing, will be needed to be successful here even more than it has been in off-shore markets.

Scientific Beta recently announced that a large European pension scheme was benchmarking a €300m mandate to Scientific Beta's climate impact consistent index. What is the attitude of institutional investors in Australia and New Zealand to climate investing?

We're continuing to see Australia's largest superannuation funds ramping up engagement in responsible investing, particularly climate investing. While headlines have focused on record growth in recent years, attention over the past 12 months has shifted to concerns around the quality of sustainability claims, or 'greenwashing', and the role of regulators. In a mixed landscape of ongoing heightened public interest and economic disruption, Australia's responsible investment market reached a record $1.5 trillion in assets under management, now representing 43% of total A$3.6tr professionally managed funds¹.

Climate continues to be a strong theme for both positive and negative screening. Investors have sought to manage climate change-related financial risks at the portfolio and organisational level, through signing up to net zero commitments, measuring carbon intensity or aligning to climate policies. Many are framing impacts and outcomes aligned to the UN Sustainable Development Goals, but others have developed their own impact measurement tools internally.

A recent Market Forces report² of the top 40 Australian super funds (by AUM) showed that most have voiced support for the climate goals of the Paris Agreement or set targets to reduce emissions to net zero by or before 2050, yet only 14 super funds, representing over $1 trillion in AUM, have either substantially divested from, have some form of exclusion on, or have plans to phase out investments in thermal coal mining companies. Some super funds that claim to be 'climate leaders' are falling behind their industry peers which have substantially divested from polluting oil and gas producers. By continuing to invest in companies pursuing plans consistent with the failure of the Paris Agreement, funds are falling short of members' expectations and their stated support for, and commitments to, global climate goals.

That said, there is a determination by an ever-growing number of institutional investors to understand what they must do to thrive and position themselves as leaders in a new era of responsible investment, which augurs well for Scientific Beta to play the role of educator and problem-solver.

How will you be assisting investors in the region?

We will assist investors in the region by bringing a depth of research and experience from Scientific Beta's European base. We are also pleased to highlight Scientific Beta's flexibility in designing bespoke solutions for investors, whether it relates to multi-factor or ESG frameworks or both, and we believe this will be a strong differentiating capability for us to promote in the region, particularly as investors address their decarbonisation objectives.

Investors appreciate service providers being in their local time zone and physically located in the region so being on the ground will give investors the confidence that Scientific Beta is serious about the Australia and New Zealand markets, plus it will enable investors to have an immediate point of contact, while retaining their network of contacts in Nice, particularly the Client Service team, and other parts of the Scientific Beta footprint.

What future opportunities do you foresee in this market?

Australia and New Zealand have been rocked by complete upheaval of the investment landscaping, including regulator-enforced benchmarking, forced mergers, Government ESG inaction, and Greenwashing scandals. As the investors reposition, the opportunities for a thoughtful and robust investor in the local landscape are great.

The consolidation of many Supers, the competition between the Supers for assets, and the difficulty of delivering stated ESG targets will favour our academically backed investment model. There will be an increasing need for a process that can be globally verified, delivered in a bespoke fashion, including the management of macroeconomic exposures and tailored ESG approaches, in a low-cost index mechanism.

As the reach of the Supers are being reigned in, the increasing growth of financial planner directed assets will continue to grow the ETF management pool. Index rule-based products, looking to add alpha and lower their ESG risk, will also be a prime opportunity for us.

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  • ¹Responsible Investment Benchmark Report 2022, conducted by EY for RIAA – Responsible Investment Association Australasia.
  • ²https://www.marketforces.org.au/campaigns/super/super-funds-divestment-exclusion-analysis/.

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Susan Rodgers is Business Development Director at Scientific Beta. She joined from State Street Global Advisors (SSGA) in Sydney, where she was Senior Account Executive and Vice President, having previously worked with SSGA in London. Susan also worked in client service and business development roles with BZW Investment Management (UK and Australia) and Bankers Trust Asset Management. She brings a successful track record and extensive knowledge of the institutional investment industry to Scientific Beta. Susan is based in Sydney.

Mike Aked is Senior Investment Specialist at Scientific Beta. He was previously Partner, Head of Research - Australia and Global Head of Asset Allocation with Research Affiliates. He has also worked with the University of Virginia Investment Management Company (UVIMCO), Sunsuper, and UBS Global Asset Management across the US, Europe, Asia, and Australia. Mike brings a wealth of academic and practical experience in fundamental, quantitative and factor investing across both single and multi-asset class frameworks. He is based in Melbourne.

Desjardins Responsible Investment ETF Based on Scientific Beta Index Recognised at the Refinitiv Lipper Fund Awards 2022

Desjardins Global Asset Management manages a comprehensive range of ETFs listed on the Toronto Stock Exchange that are based on Scientific Beta solutions, including ETFs tracking multi-factor low carbon indices.

On 17 November, 2022, the Desjardins RI Emerging Markets Multifactor - Low CO2 ETF was recognised by the Refinitiv Lipper Fund Awards 2022 as "Best ETF over 3 Years" in the Emerging Markets Equity category out of 13 other ETFs. The manager and portfolio manager of the awarded ETF is Desjardins Global Asset Management Inc.

The SciBeta Desjardins Emerging RI Low-Carbon Multifactor Index replicates the SciBeta Desjardins Emerging RI Low-Carbon Multifactor Index which selects emerging markets securities using a multi-factor approach, integrates environmental, social and governance (ESG) considerations and presents a significant reduction in the carbon intensity of the portfolio (-48.07% below that of a traditional index¹).

The SciBeta Desjardins Emerging RI Low-Carbon Multifactor Index reconciles both financial and non-financial objectives. It aims to represent the performance of large- and mid-capitalisation companies from the Scientific Beta Emerging countries universe while outperforming the capitalisation-weighted index of the universe (reference index) over the long-term and controlling sector exposures to mitigate relative sector risk vis-à-vis the reference index. It also ensures that all constituents of the index meet defined ESG standards through filtering of the underlying universe so that only stocks respecting such standards are eligible for inclusion and delivers a significant reduction in the weighted average carbon intensity of the index relative to that of the unfiltered reference index.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers.

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  • ¹Carbon intensity measures the quantity of greenhouse gases (GHG) emitted by an organisation in relation to its revenue (tons of CO2 equivalent/revenue). The GHG emissions considered are the organisation’s direct emissions (Scope 1), that is, those under its control (for example, emissions resulting from its industrial processes). Indirect GHG emissions resulting from the production and distribution of electricity, heat and steam (Scope 2) are also taken into consideration. Carbon intensity can be used to evaluate organisations that stand out from their peers in terms of GHG emissions in their internal activities. Estimated result as at June 30, 2022 of the carbon intensity of the Scientific Beta Desjardins Emerging RI Low Carbon Multifactor Index, which the Desjardins RI Emerging Markets Multifactor Low CO2 ETF seeks to replicate, compared with the Scientific Beta cap-weighted emerging markets equity traditional index. The carbon intensity of the indices represents the weighted average carbon intensity of the companies that compose them.
    
    

White Papers

In a concern for transparency, and as part of its aim to help investors to understand and to invest in smart factor and ESG/Climate indices, Scientific Beta has published a large number of white papers that are available on the Scientific Beta platform.

Featured White Papers

Scientific Beta welcomes the NZAOA's Principles for Net-Zero-Aligned Benchmarks
December 2022

The UN-convened Net-Zero Asset Owner Alliance (NZAOA) recently launched a call to action for asset owners and index providers for the development and uptake of Net-Zero-Aligned Benchmarks. NZAOA spells out 10 principles such indices should follow to underpin the alliance's goal of transitioning investment portfolios to net-zero greenhouse gas (GHG) emissions by 2050, consistent with a maximum temperature rise of 1.5°C above pre-industrial levels.

In the first part of this document, we show how Scientific Beta’s Climate Impact Consistent (CIC) indices integrate these 10 principles. Indeed, the CIC indices are designed to maximise the climate-impact potential of an investment strategy and, in line with the commitment that NZAOA members make, they "emphasise GHG emissions reduction outcomes in the real economy".

The NZAOA also points to some of the shortcomings of the European Union’s climate benchmarks. Scientific Beta has previously voiced concerns about this regulation and concurs with the NZAOA's arguments. In the second part of this document, we show how many indices that comply with the regulated Paris Aligned Benchmark (PAB) constraints fail to reflect some of the NZAOA's core benchmark principles.

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Supplements in Partnership with Industry Publications

EDHEC has established partnerships with a number of industry publications to produce special editorial supplements providing industry-relevant research of the highest academic standards.

IPE EDHEC Research Insights
Autumn 2022

The latest Scientific Beta special issue of the EDHEC Research Insights supplement to Investment & Pensions Europe looks at how inflation risk can be targeted in equity investing and how dedicated portfolios can be built from robust exposures to inflation, with the aim of protecting investors from inflation surprises. We present two families of inflation-friendly equity indices that can be employed either in a long-term strategic allocation or as a short-term tactical tool in a satellite allocation. We also examine the small set of competitor inflation-sensitive strategies currently available in the marketplace. In further articles, we review the performance of rewarded factors in the US market since 2020 through the lens of two important characteristics, namely intangibility and social distancing, and explore the role of fossil fuel divestment in financing the energy transition.

Targeting inflation risk in equity investing: Building dedicated portfolios from robust exposures
We look at how inflation risk can be targeted in equity investing and how dedicated portfolios can be built from robust exposures to inflation, with the aim of protecting investors from inflation surprises.

Inflation-friendly equity indices: Robust tools for strategic asset allocation or tactical allocation choices
We introduce a new approach to overcome macroeconomic measurement challenges and construct dedicated equity portfolios that target desired exposures to surprises in inflation expectations. We present two families of inflation-friendly equity indices that can be employed either in a long-term strategic allocation or as a short-term tactical tool in a satellite allocation.

A review of inflation-friendly equity strategies
We look at the small set of competitor inflation-sensitive strategies currently available in the marketplace. We review their main methodological choices and compare their quantitative profile relative to the Scientific Beta inflation indices.

The impact of intangibility and social distancing on the performance of rewarded factors since COVID-19
In the area of factor investing, we review the performance of rewarded factors in the US market since 2020 through the lens of two important characteristics, which are intangibility and social distancing. These two characteristics were particularly important during the COVID crisis since lockdown measures affected companies with low intangible capital and companies that could not use teleworking to overcome social distancing measures. The losses incurred in 2020 are consistent with factor investing’s risk-based rationale and should be expected by investors. The long-term reward of the consensus risk factors will not disappear in the future, and factor strategies, if properly designed, will be able to deliver their promise of long-term risk-adjusted outperformance

Financing the energy transition: What is the role of fossil fuel divestment?
On the subject of climate finance, we explore the role of fossil fuel divestment in financing the energy transition. We show that investors need to make clear distinctions between different types of fossil fuels as their stranding risk and the pace of their net zero consistent phase-out differ widely. We also illustrate the pitfalls of fossil fuel divestment by looking at the European Union’s regulated Paris-Aligned Benchmarks (PAB).

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Practitioner Publications

Selected reference papers that have been published recently by Scientific Beta in academic journals.

Targeting Macroeconomic Exposures in Equity Portfolios: A Firm-Level Measurement Approach for Out-of-Sample Robustness
Financial Analysts Journal, Volume 79, Issue 1 (2023)

We propose firm-level measures of exposures to macroeconomic risks that substantially improve out-of-sample robustness compared to standard estimation approaches. Systematic equity strategies constructed from such measures offer more consistent macro exposures out of sample than strategies that allocate across sectors or equity-style factors.

We do not find significant cost to the performance of such systematic strategies in exchange for targeting exposures to macroeconomic risks, such as interest rates, term spread, credit spread, or inflation.

Our methodology can be used to construct equity portfolios for investors who have hedging demands or active views regarding macroeconomic conditions.

French Additional Civil Service Pension Scheme Benchmarks circa €300m Mandate to Scientific Beta Climate Impact Consistent Index

One of the most prominent pension schemes in Europe, the €41.7bn additional pension scheme for French civil servants, ERAFP, had announced that it was awarding a circa €300m mandate to be benchmarked to the Scientific Beta Eurozone Climate Impact Consistent EU PAB Compliant index, and the corresponding fund has now been launched. The choice of index reflects ERAFP's climate commitments, made notably within the framework of the Net Zero Asset Owner Alliance (NZAOA).

The decision by ERAFP is a major vote of confidence in Scientific Beta's Climate Impact Consistent index offering. Since 2021, Scientific Beta has been offering these indices with pure climate objectives that allow climate exclusions and weightings to be combined in order to translate companies' climate alignment engagement into portfolio decisions.

The mandate will be awarded for a four-year term, twice renewable for one year, bringing the maximum term of the mandate to six years, and must be managed while respecting the socially responsible investing principles under which all of ERAFP's allocations have been managed since 2005.

Commenting on this announcement, Kin Yee Ng, CEO of Scientific Beta, said, "We are gratified that ERAFP has seen fit to award such a significant mandate on the basis of Scientific Beta's climate impact consistent (CIC) indices. The CIC index is the result of robust research that delivers a consistent climate offering on the market. Traditional climate indices and benchmarks, which combine financial and climate criteria, frequently lead to contradictions with compromised climate impact. We believe our CIC indices' strict focus on climate objectives raises the bar for climate action."

Seminars

Scientific Beta Seminar Series on Inflation-Friendly Equity Indices

14 March, 2023 – Breakfast presentation – Widder Hotel, Zurich, Switzerland
15 March, 2023 – Lunch presentation – Hilton Frankfurt, Frankfurt, Germany
16 March, 2023 – Afternoon presentation – Hotel Vier Jahreszeiten Kempinski, Munich, Germany

Following an extended era of low interest rates and high equity returns where inflation remained near historical lows, 2021 and 2022 saw inflation risk re-emerge as an important macroeconomic risk factor for investors. In this unstable macroeconomic environment, central banks have intervened to increase interest rates and aim to tame inflation. No matter the direction of expected inflation moves though, inflation risk has now become a key risk management consideration for investors. In order to fill a gap in terms of inflation-friendly equity solutions available to investors, Scientific Beta offers a new approach to overcome macroeconomic measurement challenges and construct two families of dedicated equity portfolios that target desired exposures to surprises in inflation expectations in either an upwards or downwards direction.

The first family of portfolios, termed Inflation-Tilted indices, are designed to fit a long-term strategic allocation framework. Based on their diversified nature, they offer a substitute to traditional cap-weighted indices with additional exposure to inflation surprises, either positive (Inflation+) or negative (Inflation-). As an illustration, the Inflation+ index, over 40 years in the US market, outperforms the broad cap-weighted index by 9.6% conditional to when inflation surprises are positive while maintaining an unconditional performance profile similar to the benchmark.

The second family of strategies, termed Inflation Bet indices, are designed as a short-term tactical tool ideal for the satellite part of investors' allocations. Investors with their own views on future short-term developments of inflation can employ this tool to exploit those views while remaining invested in the equity market. Due to their more concentrated nature, they offer stronger sensitivity to inflation surprises compared to the Tilted indices, either positive (Inflation Bet+) or negative (Inflation Bet-). As an illustration, the US Inflation Bet+ index posted a positive absolute return of 10.3% in 2022 which makes it relatively better than the broad cap-weighted index by 29.1%.

In this series of presentations, Dimitris Korovilas, PhD, Investment Product Specialist at Scientific Beta, will present the investment philosophy and the mechanics behind the construction of these indices, and will illustrate the benefits for investors with concrete investment cases.

Further details are available in the programme.

Attendance at the events is complimentary but registration is required.

For additional information, please contact Séverine Cibelly at severine.cibelly@scientificbeta.com.

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Webinars

A Review of Equity Factor Performance in 2022

2 Mars, 2023 – 4.00 pm CET / 3.00 pm GMT / 10.00 am EST

In this webinar, Daniel Aguet, Deputy CEO & Index Director at Scientific Beta, and Joseph Simonian, Senior Investment Strategist at Scientific Beta North America, will provide an overview of equity factor performance in 2022.

Factor returns have continued to recover in the wake of normalising market conditions in a manner that is consistent with their historical behaviour.

In contrast to what some market observers believe, the recovery in factor performance has been broad-based and not confined to a single factor such as value.

Moreover, we find that factor performance has been driven by some specific sectors or characteristics such as intangibility. Investors who are interested in factor investing should find the discussion highly informative. The presentation will be followed by a question-and-answer session.

Topics covered include:

• Equity factor performance has continued to recover in the wake of normalising market conditions
• Factor recovery has been broad-based
• Specific sectors or characteristics have driven recent factor performance

To participate in the webinar, please visit the dedicated registration web page.

For further information about this event, please contact Séverine Cibelly at severine.cibelly@scientificbeta.com.

Financing the Energy Transition: What is the Role of Fossil Fuels Divestment?

A webinar hosted by Erik Christiansen, ESG & Low Carbon Solutions Specialist at Scientific Beta, on 24 January, 2023 presented the findings of recent research by Scientific Beta which shows a clear hierarchy from coal to natural gas, as reflected in the fossil fuels divestment policies of many investors, and notably illustrates the pitfalls of fossil fuels divestment policies by looking at the European Union's regulated Paris Aligned Benchmarks.

To avoid a climate crisis, the global economy needs to undergo a radical transformation, shifting out of fossil fuels and into renewable and low carbon energies. Investors, however, need to make clear distinctions between different types of fossil fuels - natural gas, coal, conventional and unconventional oils - as both the stranding risk they present, and the pace of their net-zero-consistent phase-out, differ widely. In recent research, we show a clear hierarchy from coal to natural gas, which is reflected in the fossil fuels divestment policies of many investors, who implement discerning and escalating policies that support an energy transition consistent with science-based scenarios.

Topics covered include:

• Climate change and fossil fuels
• Why divest, what to divest, when to divest?
• Counterproductive Paris-Aligned Benchmark compliance

Financing the Energy Transition: What is the Role of Fossil Fuels Divestment?,
Scientific Beta white paper, November 2022

Viewpoint: And if we trusted the market to improve ESG information?

IPE (20/01/2023)

By Noël Amenc, senior advisor at Scientific Beta, associate professor of finance at EDHEC Business School, and affiliate member of EDHEC-Risk Climate Impact Institute

(...) What trust would one put in financial information that is solely reserved for investors and not published, that no independent analyst could challenge, given that the regulator would have no way of guaranteeing its veracity either? (...) There is in fact no serious study on the competitive restrictions and costs involved in access to data that is often held by a small number of actors who, moreover, are engaged in investment management or index offerings themselves. Even more surprising: even though extensive serious academic research shows the lack of reliability of ESG indicators, these are a core part of current or forthcoming regulation. Finally, there is no real proposal for genuine precautions around the use of data for portfolio construction and reporting. (...)"
Copyright IPE International Publishers Limited

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Smart beta rewards discerning devotees in 2022

Financial Times (20/01/2023)

"(...) Smart beta strategies, which aim to outperform traditional broad market capitalisation-weighted indices by filtering them according to certain factors, delivered returns as high as 15 per cent last year even as major markets fell by a fifth. Research by Scientific Beta, a factor-based data provider and consultancy, has found that value strategies — investing in global stocks deemed to be inexpensive — delivered returns of 11 per cent compared to losses of between 17 and 18 per cent for global cap-weighted indices such as the Scientific Beta Global Cap-Weighted index, FTSE All-World index and MSCI ACWI index. (...)"
Copyright Financial Times

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ERAFP’s €300m equity mandate to be benchmarked to Scientific Beta’s climate index

IPE (17/01/2023)

(...) The €41.7bn additional pension scheme for French civil servants, ERAFP, has awarded an equity mandate worth approximately €300m to an undisclosed asset manager to be benchmarked to the Scientific Beta Eurozone Climate Impact Consistent (CIC) EU PAB Compliant index. The choice of index reflects ERAFP’s climate commitments, made notably within the framework of the Net Zero Asset Owner Alliance (NZAOA), according to Scientific Beta. (...)"
Copyright IPE International Publishers Limited

On the same subject:
• French pension fund benchmarks €300m against Scientific Beta PAB climate index, ETF Stream, 26/01/2023
• Scientific Beta: Major institutional equity mandate to be benchmarked to climate index, Financial Investigator, 17/01/2023
• French Pension Scheme Benchmarks €300 Million Fund to Climate Impact Index, ESG Investigator, 17/01/2023

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NZAOA calls for development of net-zero-aligned benchmarks

Institutional Real Estate, Inc. (19/12/2022)

"(...) In a new publication entitled Scientific Beta welcomes the NZAOA's Principles for Net-Zero-Aligned Benchmarks, Erik Christiansen, ESG and low-carbon investment specialist with Scientific Beta, shows how Scientific Beta’s climate impact consistent (CIC) indices integrate these 10 principles. In effect, the CIC indices are designed to maximize the climate impact potential of an investment strategy and, align with the commitment that NZAOA members "emphasize GHG emissions reduction outcomes in the real economy". (...)"
Copyright Institutional Real Estate, Inc. (IREI)

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Viewpoint: Beyond Article 9, is there a regulation to promote real sustainability?

IPE (16/12/2022)

By Noël Amenc, senior advisor at Scientific Beta, associate professor of finance at EDHEC Business School, and affiliate member of EDHEC-Risk Climate Impact Institute

(...) Recent events have shown how anticipating forthcoming clarification on the application of a text that has been published since 2019 has created such confusion that many asset managers have had to reclassify a large number of their funds from Article 9 to Article 8. If the ultimate goal of a regulation is to provide a strong and credible message to the market to favour good behaviour, we can already affirm that the objective has failed with respect to SFDR. (...)"
Copyright IPE International Publishers Limited

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Scientific Beta: The performance of rewarded factors since COVID

Financial Investigator (13/12/2022)

By Daniel Aguet, Deputy CEO & Index Director at Scientific Beta

"(...) We reviewed the performance of rewarded factors in the US market since the beginning of 2020 up to June 2022 through the lens of two important characteristics, which are intangibility and social distancing. These two characteristics were particularly important during the COVID crisis, since lockdown measures affected more companies with low intangible capital that relied on tangible assets to generate their cash flows and companies that could not use teleworking to overcome social distancing measures and continue their activities. (...)"
Copyright Financial Investigator Publishers B.V.

As part of its international development programme and in order to strengthen its index development activity, Scientific Beta regularly recruits for positions in its global offices. To apply, please send your CV and a cover letter to recruitment@scientificbeta.com.

• Salaries are determined according to the Scientific Beta pay scale, based on qualifications and prior experience.
• Written and spoken English is essential.

For more information about Scientific Beta, please visit our website and our corporate YouTube channel.

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Senior Quantitative Climate Equity Analyst – Nice

Scientific Beta is offering an exciting opportunity for a highly motivated professional to join its Index team in Nice. Reporting to the Index Director/Deputy CEO, the successful candidate will be responsible for improving the design of Scientific Beta's ESG/Climate index offering.

This includes acting as a link between the Index department and the rest of the company, notably Client Services and the Investment Specialists, developing and documenting existing and new ESG/Climate analytics, conducting R&D on new ESG/Climate offerings, authoring associated white papers, presentations, and internal documents such as factsheets, strategy rules and marketing documents, and monitoring competitors' ESG/Climate offerings.

The successful candidate will have a Master's or PhD degree in finance, statistics or physics from a leading academic institution and at least 5-7 years of professional experience within a data provider, index provider or asset management firm. Extensive knowledge in climate science such as carbon emissions modelling, estimation of climate transition or climate physical risks is essential. Additional knowledge in the integration of ESG/Climate considerations in portfolio construction would be an asset. Independent, open-minded and resourceful, the candidate will have a thorough understanding of statistical or econometrical methods, as well as advanced programming aptitude in Matlab and will also have the necessary skills to write and deliver top quality documents, such as presentations or white papers, at short notice.

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Junior Quantitative Climate Equity Analyst – Nice

Reporting to the Index Director/Deputy CEO, the successful candidate will be responsible for improving the design of Scientific Beta's ESG/Climate index offering, monitoring competitors' ESG/Climate offerings, developing and documenting existing and new ESG/Climate analytics, drawing up associated white papers, presentations, and internal documents such as factsheets, strategy rules and marketing documents, and conducting R&D on new ESG/Climate offerings.

They will have a Master's degree in finance or statistics from a leading academic institution and at least 2 years of professional experience. The successful candidate will be familiar with the integration of ESG/Climate considerations in equity portfolio construction such as low carbon, net-zero or ESG portfolios and additional knowledge in factor investing would be an asset. Independent, open-minded and resourceful, they will have a thorough understanding of statistical or econometrical methods, as well as advanced programming aptitude in Matlab, together with the necessary skills to write and deliver top quality documents, such as presentations or white papers at short notice. Written and spoken English is mandatory.

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Business Development Analyst, DACH Region – Frankfurt or Nice

To strengthen its business development efforts in Continental Europe, Scientific Beta is seeking to recruit a Business Development Analyst covering the DACH region, i.e. Germany, Austria, and German-speaking Switzerland. The position will be based either in Frankfurt or Nice, with frequent travel throughout the DACH region.

The successful candidate will be a Member of the Business Development team, reporting to the Senior Business Development Manager for Continental Europe (based in Nice), and responsible for helping to drive growth with both asset owners (for core index solutions) and asset managers (for satellite index solutions), in addition to consultants, across the DACH region. They will help to cultivate a wide network of institutional contacts to successfully implement the company's sales strategy throughout the DACH region and help manage existing relationships in that area.

At least 5 years of institutional business development experience is required, preferably covering the DACH region, within an asset management firm, index provider or reputable financial institution. The successful candidate should ideally have strong academic qualifications and relevant investment credentials, e.g. CFA or CAIA.

We are looking for a candidate with the ability to build long-term relationships with asset owners, asset managers and consultants through a consultative and sophisticated approach to sales. They should have a strong technical capability and understanding of single-factor and multi-factor indices, low carbon and ESG indices, and macroeconomic factor equity indices, together with an entrepreneurial mindset and a passion for solutions-based sales.

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Index Data Analyst / Corporate Actions Specialist – Nice

To strengthen its operations team in Nice, Scientific Beta is recruiting an Index Data Analyst / Corporate Actions Specialist.

The successful candidate will participate in the data referential management (financial data reconciliation) to ensure data quality. They will prepare the implementation of corporate actions within the equity indices, in compliance with existing in-house processing, maintenance and index construction methodologies and validate all data and information relating to corporate actions (this includes, but is not restricted to the collection of event announcements, analysis of their qualitative and quantitative contents, and cross-checking of underlying data between all possible alternative electronic sources). They will also follow-up and maintain the preview of upcoming corporate actions on a daily basis and communicate the operations of the day for execution of the corporate events by the whole operations team. They will also be required to set up and manage all announcements to index clients and participate in advanced client support questions/data requests.

Candidates should have proven experience in a corporate action-oriented role in a middle-office environment, either within an asset management company involved in the international index replication business, or an index provider. A deep knowledge of how corporate actions impact the index (or portfolio) performance is mandatory. More generally, some experience in equity portfolio valuation is required: this includes data referential maintenance, data quality treatment, evaluation and reconciliation of different data sources for pricing issues and performance spread assessment between a fund and its reference benchmark.

Proficiency in financial data electronic services (e.g. Bloomberg, Datascope and Datastream) is required, together with familiarity with spreadsheet products and proficiency in data management. Candidates should show attention to detail and have a strong work ethic. Ability to work autonomously and as part of a team while respecting an established methodology is necessary.

Written and spoken English is essential; spoken French would be an asset.

Scientific Beta

Scientific Beta aims to encourage the entire investment industry to adopt the latest advances in smart factor and ESG/Climate index design and implementation. Established in December 2012 by EDHEC-Risk Institute, one of the top academic institutions in the field of fundamental and applied research for the investment industry, as part of its mission to transfer academic knowhow to the financial industry, Scientific Beta shares the same concern for scientific rigour and veracity, which it applies to all the services that it provides to investors and asset managers. We offer the smart factor and ESG/Climate solutions that are most proven scientifically, with full transparency of both methods and associated risks.

On January 31, 2020, Singapore Exchange (SGX) acquired a majority stake in Scientific Beta. SGX is maintaining the strong collaboration with EDHEC Business School, and principles of independent, empirical-based academic research, that have benefited Scientific Beta’s development to date.

Scientific Beta has developed two types of expertise over the years corresponding to two major concerns for investors:

• Expertise in the area of Smart Beta, and more particularly factor investing
• Expertise in the area of ESG, and particularly Climate investing

To date, Scientific Beta is offering two major types of climates objectives:

Since 2015, offerings with financial objectives respecting ESG and Carbon constraints. These offerings correspond to the application of exclusion filters, the design of which allows the financial characteristics of the index to be conserved. This involves reconciling financial objectives and compliance with ESG norms and climate obligations. As such, the Core ESG, Extended ESG and Low Carbon filters can be integrated into smart beta or cap-weighted offerings in line with the financial objectives targeted by the investor.

Since 2021, Scientific Beta has been offering indices with pure climate objectives (Climate Impact Consistent Indices) that allow climate exclusions and weightings to be combined in order to translate companies’ climate alignment engagement into portfolio decisions.

Since it was acquired by SGX in January 2020, Scientific Beta has accelerated its investments in the area of Climate Investing as part of the SGX Sustainable Exchange strategy, which is mobilising an investment of SGD 20 million. In addition, EDHEC and Scientific Beta have set up a EUR 1 million/year ESG Research Chair at EDHEC Business School.

With a concern to provide worldwide client servicing, Scientific Beta is present in Boston, London, Nice, Singapore and Tokyo. As of July 31, 2022, the Scientific Beta indices corresponded to USD 52.47bn in assets under replication. Scientific Beta has a dedicated team of 55 people who cover not only client support from Nice, Singapore and Boston, but also the development, production and promotion of its index offering. Scientific Beta signed the United Nations-supported Principles for Responsible Investment (PRI) on September 27, 2016. Scientific Beta became an associate member of the Institutional Investor Group on Climate Change (IIGCC) on April 9, 2021, and a member of the Investor Group on Climate Change (IGCC) on November 28, 2022.

Today, Scientific Beta is devoting more than 40% of its R&D investment to Climate Investing and more than 45% of its assets under replication refer to indices with an ESG or Climate flavour. As a complement to its own research, Scientific Beta supports an important research initiative developed by EDHEC on ESG and climate investing and cooperates with V.E and ISS ESG for the construction of its ESG and climate indices.

On November 27, 2018, Scientific Beta was presented with the Risk Award for Indexing Firm of the Year 2019 by the prestigious professional publication Risk Magazine. On October 31, 2019, Scientific Beta received the Professional Pensions Investment Award for “Equity Factor Index Provider of the Year 2019.” On February 1, 2022, Scientific Beta was named “Best Specialist ESG Index Provider” at the ESG Investing Awards 2022, which celebrate excellence in Environmental, Social and Governance (ESG) research, ratings, funds, and products.

Scientific Beta
2 Shenton Way, #02-02, SGX Centre I, Singapore 068804
Tel. +33 493 187 851 (from 3.00am to 11.00pm CET)
E-mail: clientservices@scientificbeta.com | Website: www.scientificbeta.com

    

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