Scientific Beta

On 14-15 November 2023, this year's in-person conference will have a federating theme of "How to innovate in passive investment strategies without forgetting the fundamentals that form the basis of the robustness of the value propositions". The first day of the conference will enable participants to analyse the limitations and challenges of constructing factor strategies, while the second day will provide a genuinely critical state-of-the-art of the data, concepts, and techniques in the area of sustainable investing.

 Robust Innovations in Passive Investing

Overview

This year's in-person conference, which will take place over two days on 14 & 15 November, 2023, will have a federating theme of "How to innovate in passive investment strategies without forgetting the fundamentals that form the basis of the robustness of the value propositions" and will include the following topics:

Day 1: The Fundamentals of Factor Investing Innovation

The objective of the first day of the conference is to allow participants to be able to analyse the limitations and challenges of constructing factor strategies. It will not only involve evaluating the usefulness of recent innovations in the area of factor investing but will also provide new avenues for constructing efficient and robust strategies, specifically looking at:

The Importance of Robustness in Factor Choice and Construction

Revisiting Diversification

Day 2: Being Serious with Sustainable Investing

The second day will provide a genuinely critical state-of-the-art of the data, concepts, and techniques in the area of sustainable investing. It will also outline the prospects for better evaluation of the financial consequences of climate change:

Take a Small Step Back on the Performance of ESG

What Data to Construct Sustainable Investment Strategies?

The Challenges in Measuring Climate Risk

Programme

Day 1 — The Fundamentals of Factor Investing Innovation — 14 November, 2023 

The Importance of Robustness in Factor Choice and Construction: 

This important conference session addresses a key point for the construction of robust portfolios in the sense that these portfolios display stable out-of-sample risk and performance characteristics. In this area, investors are confronted with two major difficulties that will be addressed by two comprehensive presentations.

The first difficulty is proper qualification of a risk factor and the dangers of sample-dependent or purely model-dependent approaches to factor selection, as is the case with machine learning, or the confusion between the desire to integrate ESG into the portfolio characteristics and the use of ESG characteristics to construct ESG risk factors.

The second difficulty is related to the manner in which traditional risk factors are constructed and the robustness problem posed by constructions that aim to maximise the returns associated with these factors in-sample, whether it involves the disappointing out-of-sample performance of these optimised multi-criteria factors, or the poor risk allocation relating to factors that already carry risk overlaps and risk instability themselves due to their construction.

  09:00am-10:00am: Breakfast & Registration

  11:40am-12:00am: Morning Break

Revisiting Diversification: 

This session maps out the outlook for real progress in the area of portfolio diversification, which corresponds to one of the key value-added proxies in the area of smart beta offerings. It is broken down into two presentations that address important questions for investors who wish to move away from cap-weighted indices.

One of the first subjects that has been addressed historically in the area of stock diversification has been that of controlling the consequences of applying popular weighting schemes in the area of intense exposure to traditional micro factors (such as value, size, etc.). Scientific Beta was a pioneer in the area of controlling these exposures and reconciling idiosyncratic risk diversification and factor allocation. More recently, with the growth in macroeconomic risks, notably inflation and interest rates, investor attention has been drawn to their portfolio’s exposure to these risks. Also on this subject, Scientific Beta has provided a decisive contribution to the proper measurement of these risks in an equity portfolio framework. The first presentation associated with this session will allow investors to benefit from and discuss the results of the research that has been conducted.

The second subject is directly related to observations made during the COVID-19 crisis, when smart beta portfolios, even when they were constructed with sector allocations that were neutral with respect to cap-weighting, exhibited large tracking errors. These tracking errors, which were the consequence of considerable performance disparities, could be observed within the same sector, due for example to the teleworking capability of the firm. This inability to control industry risk through simple sector neutrality naturally raises questions, and all the more so in that this same sector neutrality is a strong constraint in constructing high factor intensity portfolios. Scientific Beta has recently developed a new approach to controlling the industry risk factor that not only has less impact on the portfolio’s factor intensity, but also provides better control of the true drivers of inter and intra-sector return dispersion.

Finally, the third challenge of portfolio diversification is integrating climate transition risk. This challenge corresponds to a new approach to constructing climate transition risk factor portfolios, whereby this risk can be integrated into and taken into account in a multi-factor portfolio.

  1:00pm-2:00pm: Lunch Break

   4:00pm-4:30pm: Afternoon Break

   5:30pm-6:30pm: Drinks Reception

Day 2 — Being Serious with Sustainable Investing — 15 November, 2023 

Take a Small Step Back on the Performance of ESG:   

In recent years, the promoters of ESG data or index solutions have highlighted the capacity to generate outperformance by taking account of stocks’ ESG characteristics. Attractive in-sample, this performance does not stand up to a serious analysis of the real sources of the performance of ESG portfolios, which is the subject of the first presentation in this session.

The second presentation in this session will focus on ESG performance based on analysis of the risk and performance of ESG ETFs and will raise the crucial question of the existence of specific ESG performance.

  10:40am-11:00am: Morning Break

What Data to Construct Sustainable Investment Strategies?: 

The development of regulatory requirements in the area of sustainability reporting and the development of climate-aligned benchmarks, added to the constant desire of ESG and climate solutions providers to innovate, raises the issue of the quality and relevance of the data used to build these reports and strategies. This question is the subject of two presentations.

The first is devoted to the quality of climate data. Organisations identify a lack of access to robust data as the number one hurdle preventing (further) integration of ESG dimensions into financial decision-making. While climate change is now considered doubly material, investors face data challenges pertaining to limited availability – in particular of forward-looking information – and quality issues related to data materiality, accuracy, reliability, and comparability. In this session, academic and industry experts will describe the data demands placed upon investors by the net-zero agenda, discuss the dos and don’ts of data usage, shed light on issues of fitness for purpose of data and metrics advanced by regulators and standard setters, and discuss how forthcoming regulatory changes and technological innovations may change the transition data landscape for the better.

The second presentation is devoted to the highly controversial question of ESG scores in a context in which these have shown, with the occurrence of several ESG “accidents” or controversies, that they were not necessarily very predictive of the firm’s real ESG performance, and in which the recent setbacks for major institutional investors who had used these same ESG scores to construct their portfolio have shown that they could lead to strong exposure to risk of extreme financial losses.

Finally, the question of accounting for ESG objectives between themselves will be the subject of a presentation of new results from research conducted by the Scientific Beta team in a context in which investors who are always concerned about doing better multiply the ESG objectives assigned to their portfolio. The question of “is better the enemy of good?” will arise as part of a study on the dilution of the impact of a portfolio that has ambitious objectives for both climate and ESG.

   12:40pm-2:00pm: Lunch Break

   3:00pm-3:30pm: Afternoon Break

The Challenges in Measuring Climate Risk: 

The uncertainties associated with climate change are unprecedented. Precisely because statistical analysis based on past historical data has obvious shortcomings, models must play a unique role. To provide useful guidance to our understanding and actions, models must reflect both our degree of ignorance, and what we do know about the interaction between the physics and the economics of the problem. We use state-of-the-art modelling (such as recursive utility functions and Dynamic Bayesian Nets) to explore both optimal policies, and what the impact on asset prices will be under sub-optimal policies. In particular, we can associate probabilities to climate scenarios (something currently missing), offer insight about the climate risk premium, and estimate which climate outcomes current asset prices seem to reflect.

> Speaker biographies

Registration

The conference is reserved for asset owners (including pension schemes, charities, endowments, foundations, insurance companies, single family offices and financial executives from non-financial companies) and institutional consultants.

Admission is only valid when confirmed by the organisers, who reserve the right to refuse any registration request in order to preserve the diversity of the audience.

To register, please visit the dedicated registration page.

Venue

NH Barbizon Palace
Prins Hendrikkade, 59-72
Amsterdam, 1012
Netherlands

About 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 know-how 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:

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 2, 2022, Scientific Beta was named ‘Best Specialist ESG Index Provider’ at the ESG Investing Awards 2022.

Contact

Joanne Finlay
E-mail: scientificbetadays@scientificbeta.com