Util is a machine-learning company. As a herd of engineers, we’re often faced with the same question: How long until the robots take over?
The reality is, artificial intelligence (or AI) is not as smart as people think. In terms of qualitative analysis, it doesn’t compare to the fund managers who get to know companies, their supply chains and their management.
But AI has a critical role. Unlike humans, technology can do two things exceptionally well: measure companies at scale, and consistently.
In a world shaped by globalisation, that counts for a lot. We talk about ESG as if it’s three distinct categories. In reality, it accounts for every risk we couldn’t have previously measured: every extra-financial metric that informs the value of a company. Whereas, before, we could only measure one slice of a company’s value — its bottom line — we can now understand the other slices that inform the whole pie. That’s only possible with technology.
If the accounting hurdle was globalisation and its myriad accompanying risks, the solution is AI. We can finally make sense of the mess of environmental, social and financial factors that influence a company’s risk and return factors.
The trend towards assessing companies as a sum of their parts has dovetailed with another trend: that towards passive — over active — funds. Gone are the days where investors pay a premium for an active fund manager who knows his or her small universe of companies inside out. Today, retail investors are flocking to index and smart beta funds, which are exposed to a much larger basket of companies. You can’t get away with not having a clear view of the suppliers and buyers supporting your target company. Coverage is important, not just for the ability to select a diversified number of high-quality companies, but also to mitigate risk.
To date, ESG has been perceived as an active management flex: one enabled by one-to-one engagement between fund managers and companies. As retail investors pour capital into index ESG funds, that’s changing. Scale and uniformity are now key. It’s no longer enough to have a personal relationship with management or access to the rating reports for the largest 250 companies in your country. You need to understand the entire spectrum of companies in your investable universe.
It may not be as intelligent as the scaremongers assume. But AI solves the next step in the sustainable investment journey. When qualitative and quantitative analyses merge, investors will finally be able to assess the full pie.
