We are pleased to introduce The Investment Intelligence Podcast, where experts discuss all things investing, from recent market developments, to strategy, sustainable investing, asset allocation, risk management and more.
The breadth, timeliness and consistency of artificial intelligence make it a powerful tool for identifying changes in environmental performance.
AllianzGI has developed an AI “machine” that can unearth shifts in environmental performance far more quickly and accurately than ESG ratings agencies, which depend on human analysts
The tool analyses the news flow from 12,000 sources, covering the companies and countries behind 35,000 to 40,000 assets
Asset managers with technology that can gather insights ahead of the market can seek an advantage when incorporating environmental factors into investment decisions
The following article is a summary of insights from our 2021 Asia Conference.
Speaking at the Allianz Global Investors 2021 Asia conference in June, Kunal Ghosh, CIO Systematic Strategies at AllianzGI, explained how we use artificial intelligence (AI) to uncover Asian investment opportunities related to environmental transformations. Our AI Environment Model incorporates an AI “machine” that sifts through thousands of news stories as they appear, aiming to unearth shifts in environmental performance far more quickly and accurately than humans can. The goal is to discover early evidence of environment-related transformations at a range of companies in Asia, including the identification of environmental leaders and laggards.
Of course, keeping track of such a huge universe of securities is a colossal challenge. Using the entire global MSCI All Country World All Cap Index for illustration, Mr Ghosh pointed out that it encompassed about 15,000 companies. Yet just one of these firms, a multinational beverage company, was the subject of 1,300 environmental stories in a single month, each one of which could affect its environmental rating.
“Front-running” the ratings agencies
“In certain ways, you can think of our model as effectively allowing you to front-run the MSCI rating,” said Mr Ghosh. “As MSCI changes ratings and investors shift their allocations, you have the opportunity to take advantage by getting ahead of the environmental premium.”
The model has been developed over the past two years, using natural language processing and machine learning techniques to uncover the “unstructured data” in environmental news stories. The news flow comes from 12,000 sources, covering the companies and countries behind 35,000 to 40,000 assets. Any environmental-related news associated with an asset – whether a sovereign bond, corporate bond or stock – can be identified, mapped and classified.
And because the environmental score is awarded by a machine, it is naturally objective. This contrasts with the ratings agencies, where subjective opinions can lead to inconsistency. For instance, MSCI and Sustainalytics recently reached different opinions about an electric vehicle manufacturer’s environmental performance, despite having the same information.
Often, the rating agencies and our AI model reach similar conclusions, but the model’s judgments are most valuable when opinions differ. For instance, our AI Environment model has awarded high scores to a Chinese real estate developer since its recent creation of a pioneering, ecologically sustainable model in Malaysia. More recently, in 2021, this developer has been in discussions to bring similar sustainable ideas to Japan. But MSCI has been slow to catch up, only giving the firm a high rating in March 2021.
“We identified the ecologically sustainable city model that the developer was building in Malaysia and Japan,” noted Mr Ghosh. “MSCI was simply lagging; for a long time they gave the developer a poor rating. They have been known to be more than a year late in identifying positive environmental change.”
Mr Ghosh also provided the example of a Singaporean multinational bank, which received a high AI Environment score for its carbon efficient operations and environmental lending activity. However, in June 2020, this opinion was at odds with the far more critical ESG (environmental, social and governance) rating from MSCI, given the bank’s history of lending to hydrocarbon mining projects. But MSCI had not registered that the bank had started improving its environmental financing activities. Nine months later, in March 2021, MSCI caught up and upgraded its view of the bank.
AI unlocks an untapped opportunity
AllianzGI’s AI Environment model can react to news much more quickly and accurately than ESG ratings agencies, which depend on human analysts. Unstructured, text-heavy data in news reports represents an untapped opportunity for asset managers with the technology to gather insights ahead of the market. Having a model that is broad, fast and objective offers an advantage when incorporating environmental factors into investment decisions.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Equities have tended to be volatile, and do not offer a fixed rate of return. Emerging markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.
China’s efforts to provide greater access to the renminbi bonds market – work that began more than a decade ago – is giving international investors the confidence to increase their holdings.
As China’s onshore bond market has opened up, China government bonds and policy bank bonds have been included in a number of major international bond indices, prompting many investors to rapidly build up their holdings
Foreign investors are attracted to the added yield potential of China’s RMB bonds, plus the monetary policy flexibility of China’s central bank, but the steady stream of reforms is what has made these bonds more accessible
Some foreign investors have become worried about rising credit defaults and poor liquidity in onshore corporate credit bonds in particular, but China’s regulators are alert and taking action