Maria Mähl, Partner +1 917.846.4650 [email protected] Y-C-EM-12x-SR-I2-00-00 Mission Statement Make sustainable investing financially attractive and available to the mainstream. We integrate Environmental, Social and Governance (ESG) data with quantitative investment strategies to generate financial outperformance. Sustainability Big Data Finance with values In this fast-changing world, people care more than ever before about how they invest their money, and precisely how financial return is generated. By making this customizable approach accessible to all, we believe that public equity investments can be a catalyst of change, and allow investment through personalized values. Y-C-EM-12x-SR-I2-00-00 ESG Big Data • Over 90% of all the world’s data was generated in the past two years • Current level of ESG data is a fraction of what it will be in five years • Investor demand for ESG is growing rapidly • ESG to finance is what the X-Ray was to medicine • A new dimension to investing The Age of AI • AI infiltrating into everything we do, from Apple’s Siri, to Amazon’s Alexa • Arabesque’s quant models extract information out of data through pattern recognition and machine learning • AI and sustainability big data combined • Our mission is to make this technology accessible to more investors How is anti-slavery disclosure, social performance and governance being assessed by investors? How is anti-slavery disclosure, social performance and governance being assessed by investors? The role of Technology and AI in adding visibility and transparency to modern supply chains • Big Data • More reporting • Use of news and social media • Traceability software • Data Modelling • Better monitoring of working conditions • Software created to optimise errors • Demand measuring enhanced • Drones • 3D & Microscopic Barcodes • RFID (Radio Frequency Identification tags) • Unique markers – physical or chemical (can be as small as atoms) Three Lenses of S-Ray S-Ray® allows anyone to monitor the sustainability of nearly 7,000 of the world’s largest corporations GC Score ESG Score Preferences A normative assessment of each company A sector specific analysis of each company‘s A search tool that allows anyone to check based on the core principles of the United performance on financially material the business involvements of companies Nations Global Compact environmental, social and governance (ESG) against their personal values issues 0 50 100 0 100 0% 100% Bad Neutral Good Bad Good Revenues Revenues S-Ray® ESG Score: superior scores with an aim outperform the stock market The “Top 20%” outperform the “Bottom 20%” by 3.4% annually* 240.00 220.00 200.00 • The portfolio of the “Top 20%” S-Ray® ESG scores outperforms the “Bottom 20%” scores by 3.4% 180.00 p.a.* 160.00 Return • The volatility of the Top 20% is significantly lower 140.00 than the volatility of the Bottom 20% 120.00 • The Bottom 20% companies underperform the overall investment universe by 2.2% p.a. Cumulative 100.00 • Higher ESG normally correlates with lower 80.00 borrowing costs 60.00 • Integrate environmental, social and governance 40.00 data with quantitative investment strategies with an aim to generate financial performance. Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Universe Q1 Q2 Q3 Q4 Q5 *Performance from 01/02/2007 to 31/08/2019 in USD, gross of fees and transaction costs. X-C-AP-19xii-SRCS-I1-00-00 S-Ray® For Portfolio Managers RisK Fundamental Quantitative Portfolio Active Management Analysis Analysis Management Ownership & Reporting Access the sustainability Gain a stronger Receive quantitative Get a more holistic characteristics of Exercise your understanding of a sustainability data view of the various investment shareholds rights company’s points that can easily types of risKs your portfolios and tracK based on data-driven management focus be integrated into portfolio is facing momentum scores insights to better and its positioning new and existing and be able to overtime – or align your portfolio for long-term investment models communicate about develop new with your marKet profitability and factor strategies it more concisely screening and view integration models all together Y-C-EM-12x-SR-I2-00-00 How do we arrive at top level scores? S-Ray® Methodology There are 3 layers to our process: • Reports • News Input Layer o Input layer: Analyzes over 250 raw data points. Data is • NGOs measured for quality, cleaned and normalized before being mapped to the “feature layer” o Feature layer: +30 sustainability themes that serve as building blocks for top level scores Long-term trend o Top Level Scores: Combine features into easy-to-use Feature Layer 30+ Internal Taxonomy S-Ray® scores: Sustainability Topics GC Score: The GC Score provides a normative Short-term trend assessment of companies based on the four core principles of the United Nations Global Compact (GC) to approximate reputational risk: human rights, labor GC Score rights, the environment and anti-corruption. Normative Behaviour ESG Score ESG Score: Identifies companies that are better Long-Term Outperformance Score Layer positioned to outperform over the long term by measuring what is financially material for future Preferences profitability. Business Involvements Y-C-EM-12x-SR-I2-00-00 S-Ray® Methodology • Reports Data Sources • News Input Layer • NGOs S-Ray® draws data from three main sources: sustainability reports, news-based controversies, and NGO campaigns. Long-term trend o Reports: Over 250 reported metrics from sustainability and Feature Layer 30+ integrated reports Internal Taxonomy Sustainability Topics o News-based controversies: Natural Language processing scans over 80,000 public news sources across over 20 and growing Short-term trend languages daily for sustainability-related controversies o NGO campaigns: Tracks NGO campaign activity over 400 GC Score sustainability features, both positive and negative in nature Normative Behaviour ESG Score Long-Term Outperformance Score Layer Preferences Business Involvements Y-C-EM-12x-SR-I2-00-00 Item Date News value Issue Item Date News value Issue Violation of International Standards; Violation of Violation of international standards; Violation of News National Legislation; Human Rights ABuses and 30/08/2016 -0.44 national legislation; Human rights abuses and coverage Corporate Complicity; Occupational Health and corporate complicity; Child labour News 25/04/2015 -0.66 Safety Issues; Poor Employment Conditions; coverage Freedom of Association and Collective Bargaining; Forced Labour; Child Labour; Discrimination in Employment Item Date News value Issue Violation of national legislation; Human rights News abuses and corporate complicity; Supply chain 10/03/2017 -0.66 coverage issues; Poor employment conditions; Child labour Item Date News value Issue Human rights abuses and corporate complicity; News Supply chain issues; Occupational health and 28/09/2018 -0.22 coverage safety issues; Poor employment conditions; Forced labor; Child labor Input Layer S-Ray® Methodology Once the data is inputted into the database, S-Ray® cleans and organizes the data: • Reports o Cleaning • News Input Layer • NGOs • Inputs are subjected to a set of data quality checks (e.g. false outlier detection) • Poor quality data is discarded • Inputs are scaled and normalized to allow for comparison and aggregation • Sparse and infrequent time series are imputed and Long-term trend resampled to accommodate daily calculations Feature Layer 30+ Internal Taxonomy o Organizing Sustainability The cleaned inputs are organized and labeled, according to an Topics internal taxonomy. Labelling is based on two questions: Short-term trend a) What is the focus of the input? • Preparation, outcome, business involvement, news, NGO campaign (e.g. GC Score Preparation – Does the company have a Normative Behaviour human rights policy?) ESG Score b) What is the topic of the input? Long-Term Outperformance Score Layer • Based on 22 sustainability topics (e.g. employee diversity) and 12 business Preferences involvements (e.g. tobacco) Business Involvements These directly correspond to the features in the feature layer Y-C-EM-12x-SR-I2-00-00 S-Ray® Methodology Feature Layer • Reports As there can be correlation and overlap between inputs, semi- • News Input Layer supervised dimensionality reduction techniques are used to further • NGOs structure the topics. Measures are also taken to ensure there is no single or dominant reliance on any one data provider. o We first construct two types of feature sub-scores reflecting the frequency of data input: Long-term trend 1. Long-term trend Feature Layer 30+ • This score pulls together all available report-based Internal Taxonomy Sustainability metrics from the input layer, which are then Topics aggregated based on several considerations, including focus, dimensionality, and expert input Short-term trend 2. Short-term correction • Based on news-controversies and NGO campaigns, S-Ray® constructs a short-term signal using a GC Score proprietary present news value. This is a function of Normative Behaviour an article’s controversy level, how long ago it occurred, and the impact of the source ESG Score Long-Term Outperformance Score Layer o These sub-scores are then aggregated into a final feature score Preferences Business Involvements Y-C-EM-12x-SR-I2-00-00 Feature Layer S-Ray® Methodology E S G Emissions Diversity Business Ethics • Reports Environmental Stewardship Occupational Health and Corporate Governance • News Input Layer Safety • NGOs Resource Use Training and Development Transparency Environmental Solutions Product Access Forensic Accounting Waste Community Relations Capital Structure Water Product Quality and Safety Environmental Management Human Rights Labour Rights Long-term trend Compensation Employment Quality Feature Layer 30+ Business involvements Internal Taxonomy Sustainability Adult Entertainment Weapons Nuclear Stem Cells Gambling Fossil Fuel Topics Alcohol Pork GMO Short-term trend Defense Tobacco Example: Business Ethics GC Score Normative Behaviour • 18 report-based inputs are aggregated into the long-term trend score (e.g.