Frédéric Ducoulombier

The report delves into the critical role of value chain emissions in corporate sustainability efforts and investor decision-making.
The analysis confronts objections to mandatory emissions disclosure, highlighting the strategic importance of managing value chain emissions for companies and the relevance for investors to take a comprehensive approach to the climate impact and risks of investee companies.
The report also takes a hard look at the current state of reported and modelled… Voir plus

The report delves into the critical role of value chain emissions in corporate sustainability efforts and investor decision-making.
The analysis confronts objections to mandatory emissions disclosure, highlighting the strategic importance of managing value chain emissions for companies and the relevance for investors to take a comprehensive approach to the climate impact and risks of investee companies.
The report also takes a hard look at the current state of reported and modelled emissions data and how it restrains relevant data uses; it discusses the expected impact of the introduction of mandated reporting.
The report concludes with recommendations to companies, investors, and regulators aiming to improve the consideration of value chain emissions into business and financial decisions. Voir moins

- The consideration of value chain emissions is crucial as they represent a material source of emissions that companies can manage, whether to address impact or transition risks.
- Reporting of these indirect emissions has been voluntary; it remains sparse and is often guided by corporate convenience rather than emissions materiality.
- While data availability and quality are expected to improve in the medium term, reporting standards are not intended to support cross-company… Voir plus

- The consideration of value chain emissions is crucial as they represent a material source of emissions that companies can manage, whether to address impact or transition risks.
- Reporting of these indirect emissions has been voluntary; it remains sparse and is often guided by corporate convenience rather than emissions materiality.
- While data availability and quality are expected to improve in the medium term, reporting standards are not intended to support cross-company comparisons.
While data providers model value chain emissions, estimates are divergent and pay insufficient regard to firm specificities to support intra-sector comparisons.
- Investors should treat the integration of value chain considerations into asset selection and reporting cautiously to avoid greenwashing. Value chain emissions may be used to guide overall policy, implement sector allocation, or initiate engagement with companies. Value chain considerations may still be included into asset selection via specific, security-level performance metrics and/or indicators of credible decarbonisation commitments and action.
- Standard setters must avoid requiring, condoning, or encouraging uses of value emissions that are unfit for purpose, notably portfolio construction; they should support disclosure of value chain emissions, targets, and plans, along with their standardisation, including through promotion of sectoral and value chain collaborations.
Voir moins

Short piece reviewing the successful oil and gas industry challenge to climate disclosure and action, discussing the merits of its criticism of value chain emissions reporting, and highlighting areas for attention and further work for corporates, investors, and regulators.

In an op-ed published by French reference newspaper Le Monde, Emmanuel Faber, chair of the IFRS Foundation’s International Sustainability Standards Board (ISSB), represents that the double-materiality approach to sustainability reporting is a simplistic concept whose popularity derives from a “triple illusion”. In this short piece, I discuss single and double materiality, reviews Mr Faber's criticisms, and conclude on the need for political courage.
<br><br>We’re glad to see… Voir plus

In an op-ed published by French reference newspaper Le Monde, Emmanuel Faber, chair of the IFRS Foundation’s International Sustainability Standards Board (ISSB), represents that the double-materiality approach to sustainability reporting is a simplistic concept whose popularity derives from a “triple illusion”. In this short piece, I discuss single and double materiality, reviews Mr Faber's criticisms, and conclude on the need for political courage.
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Sustainability risks and opportunities are largely absent from statutory financial reporting and, due to the lack of legally binding standards, companies selectively disclose information in sustainability reports to weave narratives that too often bear little relationship to their actual impacts. Users of these reports lack relevant and reliable data to support their investment and/or engagement activities.

The realisation that climate change could present financial risks to the economy… Voir plus

Sustainability risks and opportunities are largely absent from statutory financial reporting and, due to the lack of legally binding standards, companies selectively disclose information in sustainability reports to weave narratives that too often bear little relationship to their actual impacts. Users of these reports lack relevant and reliable data to support their investment and/or engagement activities.

The realisation that climate change could present financial risks to the economy and that sustainability considerations were becoming an integral part of investment management has steered the activity of regulators and standard setters towards enhancing climate and other sustainability disclosures by and for investors. Jurisdictions concerned with promoting a transition of economic activities towards resilience to and mitigation of unfolding environmental crises are also using sustainability disclosures to encourage the integration of sustainability issues into business decisions.

While the European Union (EU) leads in this rule-making, recent corporate pressure has diluted sustainability legislation, disappointing information users.

In this short op-ed, I explain the objective and importance of the EU Corporate Sustainability Reporting Directive (CSRD) and the issues created by its watering down by the Delegated Act laying out the first set of European Sustainability Reporting Standards (ESRS) under the Directive, and invite representatives of sustainability information users to weigh in to promote the adoption of guardrails for sustainability reporting and assurance. Voir moins

In this note, we discuss the philosophy and practical recommendations of the foremost institutional-investor led net-zero investment frameworks, i.e., the Paris-aligned Investment Initiative Net-Zero Investment Framework Implementation Guide (v1.0) and the UN-convened Net-Zero Asset Owner Alliance Target Setting Protocol (v2.0).

After providing some background on the investor coalitions involved, we underline that both frameworks share a concern for aligning investment management… Voir plus

In this note, we discuss the philosophy and practical recommendations of the foremost institutional-investor led net-zero investment frameworks, i.e., the Paris-aligned Investment Initiative Net-Zero Investment Framework Implementation Guide (v1.0) and the UN-convened Net-Zero Asset Owner Alliance Target Setting Protocol (v2.0).

After providing some background on the investor coalitions involved, we underline that both frameworks share a concern for aligning investment management towards net-zero in a manner that contributes to the transition. We present the three channels that investors may use to try and alter activity in the real economy and explain the importance given to each of these channels by the frameworks. We then give a high-level description of the components of each framework before discussing how top-level portfolio targets are to be defined in relation to IPCC scenarios and how the frameworks require the setting of investment management targets in relation to investor impact channels to promote real-world outcomes. Finally, we look at the frameworks’ recommendations for equity investment management, reviewing requirements and recommendations in relation to portfolio construction approaches and engagement activities and the roles they may play for portfolio alignment and the promotion of investor impact. Voir moins

The Task Force on Climate-related Financial Disclosures (hereafter TCFD or the taskforce) was established in December 2015 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system by coordinating national financial authorities and international standard-setting organisations. The creation of the TCFD was prompted by the recognition that financial market participants had insufficient information about climate risks… Voir plus

The Task Force on Climate-related Financial Disclosures (hereafter TCFD or the taskforce) was established in December 2015 by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system by coordinating national financial authorities and international standard-setting organisations. The creation of the TCFD was prompted by the recognition that financial market participants had insufficient information about climate risks and opportunities faced by companies, with obvious negative implications for efficient asset pricing and capital allocation, and possible risks to financial stability.

In 2017, the TCFD released climate-related financial disclosure recommendations designed to help companies provide better information to support better financial-decision making amongst stakeholders.

These recommendations have rapidly become a central reference for reporting of financially material climate-related risks and opportunities. This is primarily due to voluntary updates by corporates and the financial sector and regulatory initiatives requiring or encouraging reporting according to TCFD recommendations.

On 14 October 2021, the TCFD published a status report highlighting the accelerated uptake of its recommendations along with a new Guidance on Metrics, Targets, and Transition Plans and the first update to the implementation guidance on its June 2017 recommendations.

This note reviews the background and architecture of the TCFD recommendations and presents the updated guidance with a focus on new or updated disclosures requirements and advice. Voir moins

In this note, we discuss the philosophy and practical recommendations of the “Net Zero Investment Framework Implementation Guide” of the Paris Aligned Investment Initiative and the “2025 Target Setting Protocol” of the United Nations-convened Net-Zero Asset Owner Alliance with a focus on equity portfolio management.
After providing some background on the investor coalitions involved, we underline that both frameworks share a concern for aligning investment management towards net-zero in a… Voir plus

In this note, we discuss the philosophy and practical recommendations of the “Net Zero Investment Framework Implementation Guide” of the Paris Aligned Investment Initiative and the “2025 Target Setting Protocol” of the United Nations-convened Net-Zero Asset Owner Alliance with a focus on equity portfolio management.
After providing some background on the investor coalitions involved, we underline that both frameworks share a concern for aligning investment management towards net-zero in a manner that contributes to the transition; we present the three channels that investors may use to try and alter activity in the real economy and explain the importance given to each of these channels by the frameworks. We then give a high-level description of the components of each framework before discussing how top-level portfolio targets are to be defined in relation to IPCC scenarios and how the frameworks require the setting of investment management targets in relation to investor impact channels to promote real-world outcomes. Finally, we look at the frameworks’ recommendations for equity investment management, reviewing requirements and recommendations in relation to portfolio construction approaches and engagement activities and the roles they may play for portfolio alignment and the promotion of investor impact. Voir moins

Proper incorporation of climate change issues into portfolio management requires attention to firm-level greenhouse gas emissions. Since value chain emissions make up the largest share of emissions for most firms, their consideration appears natural for both impact- and risk-management motivated investors. However, the reporting of these emissions remains voluntary in most jurisdictions and is sparse. Furthermore, reporting standards are not intended to support comparisons between firms. While… Voir plus

Proper incorporation of climate change issues into portfolio management requires attention to firm-level greenhouse gas emissions. Since value chain emissions make up the largest share of emissions for most firms, their consideration appears natural for both impact- and risk-management motivated investors. However, the reporting of these emissions remains voluntary in most jurisdictions and is sparse. Furthermore, reporting standards are not intended to support comparisons between firms. While data providers offer value chain emissions estimates, these typically take insufficient consideration of firm-level circumstances to support intra-sector comparisons. Investors should thus treat the integration of value chain considerations into asset selection with extreme caution. Value chain emissions may be used to guide overall policy, implement sector allocation, or initiate engagement with firms. Value chain considerations still may be included into asset selection or weighting via specific, firm-level performance metrics and/or commitments to decarbonize. Investors also should advocate for value chain emissions disclosure in their policy and issuer engagements. Voir moins

The recent update of the EU Benchmark Regulation mandates the use of enterprise value rather than revenues as denominator for the computation of carbon intensity. The regulator’s advisers justified the substitution by its detrimental impact on the coal industry and affirmed that enterprise value—like revenues—would be applicable to both equity and fixed income indices. However, all companies with low enterprise value to sales suffer from the change, and enterprise value cannot be computed in… Voir plus

The recent update of the EU Benchmark Regulation mandates the use of enterprise value rather than revenues as denominator for the computation of carbon intensity. The regulator’s advisers justified the substitution by its detrimental impact on the coal industry and affirmed that enterprise value—like revenues—would be applicable to both equity and fixed income indices. However, all companies with low enterprise value to sales suffer from the change, and enterprise value cannot be computed in the absence of equity market capitalization. Furthermore, enterprise value inherits equity market volatility, which weakens the link between changes in measured carbon intensity and underlying emissions and produces metric volatility that rewards an issuer’s market performance over its decarbonization performance. Impact-concerned investors that wish to guide portfolio decarbonization by carbon intensity should favor the use of revenues as denominator over that of enterprise value so as to encourage reductions in emissions and gains in process efficiency in the real economy. Voir moins

We look at the evidence on the divergence of isser-level ESG ratings across data providers and review the academic work analysing its causes. We then highlight concerns arising when constructing or measuring portfolio-level ESG risks or performance from weigthed average of investee company score scores. To combat misleading statements about ESG performance and risks, and notably greenwashing, we advocate for the use of simpler and/or more objective ESG indicators at issuer-level, against… Voir plus

We look at the evidence on the divergence of isser-level ESG ratings across data providers and review the academic work analysing its causes. We then highlight concerns arising when constructing or measuring portfolio-level ESG risks or performance from weigthed average of investee company score scores. To combat misleading statements about ESG performance and risks, and notably greenwashing, we advocate for the use of simpler and/or more objective ESG indicators at issuer-level, against letting weighted average score optimisation guide portfolio construction, for primarily assessing portfolio-level ESG performance by share of investment failing/meeting standards on key ESG issue, and for limiting the reporting of portfolio averages of ESG indicators to cases where they are grounded in physical and/or financial realities or correspond to industry standards. Voir moins

This paper documents Scientific Beta’s top-down approach to integrating Environmental, Social and Governance (ESG) considerations into systematic investment strategies, with a particular focus on Climate Change.

Magazine version of our piece on dos and don'ts of Scope 3 concerns incorporation into portfolio management.

Magazine version of our appraisal of the delegated acts pertaining to benchmark sustainability disclosures and EU Climate Benchmarks.

This paper describes the ESG Overhaul of the EU Benchmark Regulation and focuses on important shortcomings. It explains how mandated sustainability disclosures do more to advanced the interests of data providers than decision making around sustainability. It then shows why the standards for the EU Climate Benchmarks incentivise reduction of portfolio exposure to high carbon intensity sectors over the promotion and reward of decarbonisation in the real economy consistent with the Paris… Voir plus

This paper describes the ESG Overhaul of the EU Benchmark Regulation and focuses on important shortcomings. It explains how mandated sustainability disclosures do more to advanced the interests of data providers than decision making around sustainability. It then shows why the standards for the EU Climate Benchmarks incentivise reduction of portfolio exposure to high carbon intensity sectors over the promotion and reward of decarbonisation in the real economy consistent with the Paris Agreement. Its final section calls on investors to advocate better disclosures and to perform due diligence to avoid associating with greenwashing. Voir moins

This publication looks at the issues with the use of enterprise value for normalising greenhouse gas emissions in the context of EU Climate Benchmark portfolio construction. It shows that this variation on the standard approach to carbon intensity has not been properly justified or thought through. It explains how the regulator inegrated stakeholder feedback to account for some of the data issues and biases plaguing enterprise value and looks at remaining problems. In particular, it documents… Voir plus

This publication looks at the issues with the use of enterprise value for normalising greenhouse gas emissions in the context of EU Climate Benchmark portfolio construction. It shows that this variation on the standard approach to carbon intensity has not been properly justified or thought through. It explains how the regulator inegrated stakeholder feedback to account for some of the data issues and biases plaguing enterprise value and looks at remaining problems. In particular, it documents how the equity market volatility imported into the metric weakens the link between changes in measured carbon intensity and underlying emissions, and facilitates greenwashing. It concludes with recommendations for investors. Voir moins

Magazine version of our work analysing the unintended consequences of guiding portfolio decarbonisation by emissions to enterprise value.

The consideration of value chain emissions is important as they represent a material source of emissions which companies can be incentivised to reduce, and it can improve the assessment of transition risk and opportunities. However the reporting of these indirect emissions remains voluntary in most jurisdictions and is sparse. While pull and push factors suggest increased data availability in the medium term, reporting standards are not intended to support crosscompany comparisons. Data… Voir plus

The consideration of value chain emissions is important as they represent a material source of emissions which companies can be incentivised to reduce, and it can improve the assessment of transition risk and opportunities. However the reporting of these indirect emissions remains voluntary in most jurisdictions and is sparse. While pull and push factors suggest increased data availability in the medium term, reporting standards are not intended to support crosscompany comparisons. Data providers offer value chain emissions estimates but these typically take insufficient consideration of corporate circumstances to support intra-sector comparisons. Investors should treat the integration of value chain considerations into asset selection with extreme caution lest they should encourage greenwashing. Value chain emissions may be used to guide overall policy, implement sector allocation or initiate engagement with companies. Value chain considerations may still be included in asset selection via specific, security-level performance metrics and/or corporate commitment to decarbonisation. Investors should also advocate for value chain emissions disclosure in their policy and issuer engagements. Voir moins

Magazine version of our piece on dos and don'ts of Scope 3 concerns incorporation into portfolio management.

This article presents a brief summary of our critical appraisal of the proposals of the Technical Expert Group on Sustainable Finance that are to inform the European Commission in the drafting of Delegated Acts implementing EU Regulation 2019/2019 on climate benchmarks and benchmarks’ ESG disclosures.

In this paper, we review the proposals of the Technical Expert Group on Sustainable Finance charged with advising the European Commission in the context of the preparation of delegated acts implementing EU Regulation 2019/2089 on climate benchmarks and benchmarks' ESG disclosures. We find that these proposals: (i) do not respect the spirit of the Regulation and are arguably ultra vires, (ii) have been unduly influenced by commercial interests and champion the interests of
ESG data and… Voir plus

In this paper, we review the proposals of the Technical Expert Group on Sustainable Finance charged with advising the European Commission in the context of the preparation of delegated acts implementing EU Regulation 2019/2089 on climate benchmarks and benchmarks' ESG disclosures. We find that these proposals: (i) do not respect the spirit of the Regulation and are arguably ultra vires, (ii) have been unduly influenced by commercial interests and champion the interests of
ESG data and services providers rather than sustainability; (iii) are flawed, do little to discourage greenwashing in the financial industry or support decarbonisation efforts in the real economy, and fail to promote better decisionmaking around sustainability. We offer remedies. Voir moins

Five page introduction to the Low Carbon Option available across Scientific Beta's flagship offering.

Five page introduction to the ESG available across Scientific Beta's flagship offering.

5-page presentation of the Low Carbon Fiduciary Option applicable across Scientific Beta's Multi-factor Offering.

5-page presentation of the ESG Fiduciary Option applicable across Scientific Beta's Multi-factor Offering.

Three-page presentation of the Enhanced ESG analytics implemented on the the Scientific Beta index platform.

Three-page presentation of the ESG fiduciary option available across the Scientific Beta multi-factor offering.

Three-page presentation of the Low Carbon fiduciary option available across the Scientific Beta multi-factor offering.

This white paper gives a presentation of the ESG fiduciary option available for application to Scientific Beta’s flagship offering and documents its impact on indicators of ESG risks and performances and financial risks and performances.

This paper provides a short description and justification of the Enhanced ESG analytics that are available on the Scientific Beta platform and illustrates how to use these to assess index-based investments against ESG standards or, where relevant, to proxy exposure to ESG risks.

This paper gives a short presentation of the ESG fiduciary option available for application to Scientific Beta’s flagship offering and documents its impact on indicators of ESG risks and performances and financial risks and performances.

This paper gives a short presentation of the Low Carbon fiduciary option available for application to Scientific Beta’s flagship offering and documents its impact on indicators of Climate Change contribution; measures of potential exposure to the risks of a transition to a low carbon economy; and financial risks and performances.

This white paper describes and justifies the Enhanced ESG analytics that are available on the Scientific Beta platform and illustrates how to use these to assess index-based investments against ESG standards or, where relevant, to proxy exposure to ESG risks.

This paper presents the Low Carbon fiduciary option available for application to Scientific Beta’s flagship offering and documents its impact on indicators of Climate Change contribution; measures of potential exposure to the risks of a transition to a low carbon economy; and financial risks and performances.

This technical note describes the low carbon-filtering approaches developed by ERI Scientific Beta that are optimised to produce high carbon footprints and/or carbon efficiency gains with low exclusion budgets, while preserving sector representation.

This technical note discusses how Environmental, Social and Governance (ESG) considerations can be
incorporated into a multi-factor investing context and presents ERI Scientific Beta's philosophy in the matter as well as the bases and processes for the different negative and positive ESG screens that ERI Scientific Beta can implement to accompany institutional investors in the application of responsible investment principles to systematic smart beta and factor investment.

This updates our 2016 paper to reflect the application of our High Factor Exposure filter to our standard and dynamic defensive solutions.

This article explains the relevance of blending risk factors, discusses the pros and cons of two competing multi-factor portfolio construction approaches and introduces a hybrid approach that reconciles the higher factor intensity of the bottom-up approach with the transparency, flexibility and efficiency of the top-down approach.

We compare different approaches for constructing multifactor equity portfolios: bottom-up score-weighting approaches that target high-factor intensity and top-down approaches that also consider diversification objectives. We find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia, because exposure to unrewarded risks more than offsets the benefits of increased factor scores. High factor scores in bottom-up approaches also come with high… Voir plus

We compare different approaches for constructing multifactor equity portfolios: bottom-up score-weighting approaches that target high-factor intensity and top-down approaches that also consider diversification objectives. We find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia, because exposure to unrewarded risks more than offsets the benefits of increased factor scores. High factor scores in bottom-up approaches also come with high instability and turnover. We introduce an approach that considers cross-factor interactions in top-down portfolios through an adjustment at the stock-selection level. While producing lower factor intensity than bottom-up methods, this approach leads to higher levels of diversification and produces higher returns per unit of factor intensity. It dominates bottom-up approaches in terms of relative performance, while considerably reducing extreme relative losses and turnover. Voir moins

Compares Scientific Beta's well-diversified "top-down" multi factor approaches with "bottom-up" score-weighting approaches that target high factor intensity. Finds that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia and that high factor scores in "bottom-up" approaches also come with high instability and high turnover. Introduces an approach that considers cross-factor interactions in "top-down" portfolios through an adjustment at the stock… Voir plus

Compares Scientific Beta's well-diversified "top-down" multi factor approaches with "bottom-up" score-weighting approaches that target high factor intensity. Finds that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia and that high factor scores in "bottom-up" approaches also come with high instability and high turnover. Introduces an approach that considers cross-factor interactions in "top-down" portfolios through an adjustment at the stock selection level. While producing lower factor intensity than "bottom-up" methods, this approach leads to higher levels of diversification and higher returns per unit of factor intensity and dominates "bottom-up" approaches in terms of relative performance, while considerably reducing extreme relative losses and turnover. Voir moins

This article introduces alternative approaches to improving diversification in minimum and low volatility strategies and documents the benefits of implementing these strategies with well-diversified factor indices tilted towards the Low Risk factor using 45 years of U.S. large and mid-cap data.

Clarifies the distinction between low and minimum volatility strategies. Discusses the limits of each of these strategies and remedies.

Describes the design and performance of a defensive equity strategy that uses dynamic multi-factor allocation and a relative risk budget to reconcile downside protection with upside capture.

Analysis of the popular Scientific Beta Multi-Beta Multi-Strategy Four-Factor EW index and discussion of its live performance.

Explains how to design dynamic defensive multi-factor strategies combining significant downside risk protection and excellent upside capture.

Clarifies the differences behind minimum volatility and low volatility strategies

Describes how to improve traditional defensive strategies by using well-diversified indices tilting towards low volatility stocks.

Article reviewing the academic underpinnings of minimum and low volatility strategies and discussing their limits.

Article describing how traditional defensive equity strategies can be improved upon by improving diversification.

Article explaining how the ERI Scientific Multi-Strategy Relative Volatility (90%) solution dynamically draws on the full range of long-term factor risk premia to deliver a dissymmetric defensive profile that reconciles downside risk protection with excellent upside capture.

Article surveying the multi-factor index landscape and underlining robustness risks requiring investor attention.

While sharing the same objective, indices aiming to provide multiple factor exposures may opt for
very different implementation methods, which reflect differences in underlying beliefs on multi-factor investing. This article reviews the current offerings in the world of multi-factor indices and
looks at the conceptual considerations involved in designing the different approaches. The key
issues that we discuss involve the robustness and consistency of the multi-factor indices as well… Voir plus

While sharing the same objective, indices aiming to provide multiple factor exposures may opt for
very different implementation methods, which reflect differences in underlying beliefs on multi-factor investing. This article reviews the current offerings in the world of multi-factor indices and
looks at the conceptual considerations involved in designing the different approaches. The key
issues that we discuss involve the robustness and consistency of the multi-factor indices as well as the (lack of) diversification among the various products. Voir moins

Extended interview discussing our recent research on the under-appreciated importance of diversification in factor investing.

Smart Beta strategies, as one of the strongest growth areas in investment management recently, have established a space in between traditional (cap-weighted) passive investments and traditional (proprietary and discretionary) active management. Perhaps unsurprisingly, Smart Beta has
drawn fierce criticism from both advocates of traditional active management and of traditional passive management. In a nutshell, proponents of proprietary active strategies complain that Smart Beta is not active… Voir plus

Smart Beta strategies, as one of the strongest growth areas in investment management recently, have established a space in between traditional (cap-weighted) passive investments and traditional (proprietary and discretionary) active management. Perhaps unsurprisingly, Smart Beta has
drawn fierce criticism from both advocates of traditional active management and of traditional passive management. In a nutshell, proponents of proprietary active strategies complain that Smart Beta is not active enough while proponents of traditional cap-weighting say that Smart Beta is not passive enough. Smart Beta providers have not only responded to such criticism, but have also been vocal about the benefits of their respective approaches, without necessarily agreeing
with one another. Such debates have too often led to misconceptions. The objective of this paper is to review ten common but mistaken claims about Smart Beta, and to shed light on the underlying issues. Voir moins

Five-page summary of the salient results of our article titled Diversified or Concentrated Factor Tilts (The Journal of Portfolio Management, Winter 2016).

Interest in defensive equity strategies has grown tremendously in recent years. Designed to provide relative downside protection by lowering exposure to market risk, they have however returned sterling risk-adjusted performance over the long term.
We note that the Low Risk “anomaly” has spurred advances in asset pricing and explain how Low Risk has gained acceptance as a factor.
We discuss the different theoretical foundations and construction steps underpinning Minimum & Low Volatility… Voir plus

Interest in defensive equity strategies has grown tremendously in recent years. Designed to provide relative downside protection by lowering exposure to market risk, they have however returned sterling risk-adjusted performance over the long term.
We note that the Low Risk “anomaly” has spurred advances in asset pricing and explain how Low Risk has gained acceptance as a factor.
We discuss the different theoretical foundations and construction steps underpinning Minimum & Low Volatility strategies, present the benefits and limitations of these approaches as they have been applied in practice and introduce alternative implementations that improve diversification.
We implement Low & Minimum Volatility strategies with Smart Factor Indices tilted towards the Low Risk factor and document their remarkable performance and risk-adjusted performance relative to the broad market benchmark and traditional defensive strategies offering comparable volatility reduction or downside protection.
Finally, we show how 3rd-generation Smart Beta Solutions can dynamically draw on multiple factor sources of long-term outperformance to engineer pay-offs combining downside risk protection and improved upside capture. We explain how these solutions rely on well-documented properties of volatility to seamlessly adjust their defensive character to market conditions by targeting a constant reduction in relative volatility. Using 45 years of US data, we show how the solution targeting a 10% volatility reduction delivers significantly higher returns than and as good a Sharpe ratio as the Low Volatility Smart Factor Indices, has an exceptionally high information ratio (IR) for a defensive strategy and very high probabilities of outperforming the market over the short/medium-terms. Over the past 10 years, it continues to dominate in terms of IR and probabilities of outperformance and produces returns at worst similar to, and typically much better than, equally or more defensive 3rd-party indices. Voir moins

This White Paper explains the relevance of Multi-Beta Multi-Strategy indices, i.e. Smart Factor Indices that diversify not-only firm-specific risk but also weighting-specific risk and that offer exposure to multiple factor tilts. The paper illustrates their performance and risk benefits using three flagship Multi-Beta Multi-Strategy indices offered by ERI Scientific Beta and discusses robustness and implementation benefits.

Presents some of the key results in our eponymous article published in The Journal of Portfolio Management.

Smart beta was conceived as a response to two drawbacks of broad capitalisation-weighted indices: their sub-optimal exposure to rewarded risk factors beyond the market factor and their insufficient diversification of unrewarded risks. In the recent commercial rush towards factor investing, the question of diversification has taken a back seat to that of factor tilts. Reviewing the academic literature, the article shows that concentration of factor-tilted portfolios is at odds with the seminal… Voir plus

Smart beta was conceived as a response to two drawbacks of broad capitalisation-weighted indices: their sub-optimal exposure to rewarded risk factors beyond the market factor and their insufficient diversification of unrewarded risks. In the recent commercial rush towards factor investing, the question of diversification has taken a back seat to that of factor tilts. Reviewing the academic literature, the article shows that concentration of factor-tilted portfolios is at odds with the seminal work on factor investing. Using 40 years of U.S. data, it compares the risk and performance characteristics of capitalisation- vs. equal-weighted factor-tilted portfolios constructed from broad (half-universe) and narrow (top two deciles) stock selections across six popular factors (Mid cap, Value, positive Momentum, Low Volatility, Low Investment and High Profitability). Equally-weighted portfolios deliver higher returns and risk-adjusted returns and have higher probabilities of outperforming the broad market. Analysed in the Carhart framework, they produce much higher alphas and alphas per unit of residual standard deviation and higher reduction in idiosyncratic volatility. While moving from a broad to a narrow selection produces higher gross returns, it also increases volatility and tracking error, resulting in at best marginal gains in risk-adjusted performance before taking into account the costs of severely heightened turnover and reduced liquidity associated with narrower selections. In the end, the benefits of (naively) diversifying factor-tilted portfolios based on the broad selection far outweigh those of shifting to a narrow selection while remaining cap-weighted. Doing so produces much better performance and risk-adjusted performance in the short and the long term while only marginally impacting turnover. Voir moins

Short presentation of our recommendations for further improving retirement solutions in Australia.

Summary of our paper titled "Superannuation v2.0: Towards the Next Generation of Pension Funds in Australia"

Summary of our paper titled "Superannuation v2.0: Towards the Next Generation of Pension Funds in Australia"

This paper discusses potential improvements to the design of retirement products in the Superannuation system, including the impact of transparency and governance on the credibility of the pension investment solutions, the role of market structure and competition on the creation of adequate investment options, the role of asset allocation and risk management in the determination of optimal pension products including default options, and the matter of the horizon of lifecycle investment… Voir plus

This paper discusses potential improvements to the design of retirement products in the Superannuation system, including the impact of transparency and governance on the credibility of the pension investment solutions, the role of market structure and competition on the creation of adequate investment options, the role of asset allocation and risk management in the determination of optimal pension products including default options, and the matter of the horizon of lifecycle investment solutions in a country with rising longevity. Voir moins

Two-page abstract of our eponymous publication.

Summary of the key insights from our survey of European end-invvestors’ perceptions, needs and expectations with regards to the transparency of indices.

In the context of the recent consultations on the regulation of financial benchmarks, index providers have petitioned regulators to curtail transparency requirements explaining that they were not aware of any transparency issue across the industry, that they already had strong incentives to offer the best transparency to the market and that the provision of more granular information would not only be useless to investors but could also be potentially harmful to them.

Between August and… Voir plus

In the context of the recent consultations on the regulation of financial benchmarks, index providers have petitioned regulators to curtail transparency requirements explaining that they were not aware of any transparency issue across the industry, that they already had strong incentives to offer the best transparency to the market and that the provision of more granular information would not only be useless to investors but could also be potentially harmful to them.

Between August and November 2013, EDHEC-Risk Institute surveyed institutional end-investors across Europe on their perceptions and expectations with respect to the governance and transparency of indices. The survey’s 109 respondents include Europe’s largest pension and reserve funds, insurance and provident institutions and their asset management subsidiaries; hailing from 20 countries and dependencies, they collectively provide protection to hundreds of millions of scheme participants and clients in Europe and beyond.

This document describes the state of regulation and discussions about the governance and transparency of indices and gives an opportunity to end-users to have their voices heard in a debate that is being held in their name. Voir moins

A brief description of recent regulatory developments affecting indices, with a focus on Europe.

This article reviews recent regulatory developments related to indexing with particular emphasis on the issue of transparency. It describes UCITS regulation up to 2012 and the watershed ESMA guidelines, covers the international consultations on financial benchmark of 2012-2013 and their outcome and calls upon lawmakers to focus regulation on transparency to promote competition, innovation and a high level of investor protection in the indexing industry.

Interview with IndexUniverse’s European editor, Rebecca Hampson, on why investors should have access to index data and why EDHEC-Risk Institute has so fiercely campaigned in favour of index transparency

Letter to the Chair of the Committee on Economic and Monetary Affairs of the European Parliament regarding the European Commission proposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts. The letter calls on the Committee to balance the benefits of governance and control requirements with their direct and indirect costs for investors, to be wary of promoting a misplaced sense of confidence in opaque benchmarks on the basis of governance-based… Voir plus

Letter to the Chair of the Committee on Economic and Monetary Affairs of the European Parliament regarding the European Commission proposal for a Regulation on indices used as benchmarks in financial instruments and financial contracts. The letter calls on the Committee to balance the benefits of governance and control requirements with their direct and indirect costs for investors, to be wary of promoting a misplaced sense of confidence in opaque benchmarks on the basis of governance-based regulation and to instead uphold high levels of transparency in the index industry so as to subject benchmark integrity to multilateral control, promote adequate and suitable uses of indices and support information-based competition and further innovation. Voir moins

Provides a short critical summary of IOSCO's Principles for the Regulation of Exchange Traded Fund and calls on regulators to mandate high standards of transparency for indices and indexing products.

This article presents the key insights from the recent EDHEC-Risk Institute Publication titled "Investment Solutions for East Asia's Pension Savings", whose lead author is Dr Frédéric Blanc-Brude. It reviews the state of retirement provision in East-Asia, presents new evidence on the expected costs of ageing, discusses how state-of-the-art risk and investment management techniques can help avert the impending pension crisis and calls on public authorities to demand reform in the retirement… Voir plus

This article presents the key insights from the recent EDHEC-Risk Institute Publication titled "Investment Solutions for East Asia's Pension Savings", whose lead author is Dr Frédéric Blanc-Brude. It reviews the state of retirement provision in East-Asia, presents new evidence on the expected costs of ageing, discusses how state-of-the-art risk and investment management techniques can help avert the impending pension crisis and calls on public authorities to demand reform in the retirement provision sector and to incentivise accumulation into adequate retirement solutions before the region’s demographic window of opportunity closes. Voir moins

A presentation of our proposals on improving the management of non-financial risks that emphasises their relevance to Asian investors, regulators and asset managers.

A short editorial piece on why index transparency is of paramount importance, in reaction to the ESMA Securities and Markets Stakeholder Group's suggestion that the governance approach and transparency approach are substitutable and that the former is the high road and the latter a fallback solution enabling external monitoring to be carried out in the absence of "sound governance mechanisms".

Short piece on the role played by inadequate regulation and supervision in the rise of non-financial risks.

While index provision is generally not a regulated activity, regulators have for long imposed qualitative restrictions on indices that could be used by retail funds. However, these requirements were relatively high-level. It is only recently, against the backdrop of the rapid growth and diversification of indexing products, and in the shadow cast by integrity issues with the oil price and interbank rate benchmarks, that indices have received closer scrutiny and the question of imposing higher… Voir plus

While index provision is generally not a regulated activity, regulators have for long imposed qualitative restrictions on indices that could be used by retail funds. However, these requirements were relatively high-level. It is only recently, against the backdrop of the rapid growth and diversification of indexing products, and in the shadow cast by integrity issues with the oil price and interbank rate benchmarks, that indices have received closer scrutiny and the question of imposing higher standards of methodological quality, governance and transparency upon indices has been discussed.

In this article, we review recent regulatory developments and ongoing discussions related to indexing with particular emphasis on transparency, which has taken on critical importance with the emergence of new forms of indices. We argue that transparency is the best mitigator of conflicts of interest, underline why it is paramount for assessment of relevance and suitability, comment on the state of transparency in the index provision industry and conclude with recommendations aimed at promoting fair competition and a high level of investor protection in the indexing industry without creating barriers to innovation. Voir moins

Abstracts our eponymous report.

Short piece presenting our Restricted UCITS proposal.

This document concludes three years of research on better management of non-financial risks within the European fund management industry and put forward a series of proposals to limit these risks which emerged during the 2007-2008 crisis and undermined the quality of the UCITS label. It is our fervent hope that the three key recommendations we make, on the reinforcement of information on non-financial risks, increased responsibility of all actors within the fund management industry, and the… Voir plus

This document concludes three years of research on better management of non-financial risks within the European fund management industry and put forward a series of proposals to limit these risks which emerged during the 2007-2008 crisis and undermined the quality of the UCITS label. It is our fervent hope that the three key recommendations we make, on the reinforcement of information on non-financial risks, increased responsibility of all actors within the fund management industry, and the creation of a new label of “Restricted UCITS,” be adopted by the industry so as to restore the reputation of the UCITS brand to its previously hard-earned and rightful place. Voir moins

In the wake of the interbank rate manipulation scandals, this document is EDHEC-Risk Institute's contribution to the regulatory debate on indices and benchmarks. The document looks at the regulatory context, reviews issues with equity indices and benchmarks with emphasis on conflicts of interest and transparency and makes ten recommendations on the regulation of indices.

EDHEC-Risk Insitute has put forward a model to optimise the investment and risk management
practices of sovereign wealth funds, which can be regarded as the extension to sovereign wealth funds of the liability-driven investing paradigm recently developed in the pension fund industry.
The model suggested that the investment strategy of a sovereign wealth fund should involve a state-dependent allocation to three main building blocks: a performance-seeking portfolio, an endowment-hedging… Voir plus

EDHEC-Risk Insitute has put forward a model to optimise the investment and risk management
practices of sovereign wealth funds, which can be regarded as the extension to sovereign wealth funds of the liability-driven investing paradigm recently developed in the pension fund industry.
The model suggested that the investment strategy of a sovereign wealth fund should involve a state-dependent allocation to three main building blocks: a performance-seeking portfolio, an endowment-hedging portfolio, and a liability-hedging portfolio.
The objective of the current publication is to compare these research conclusions with current perceptions by sovereign investment professionals. There is indeed widespread belief in the public that sovereign wealth funds are long-term investors free of liabilities and short-term constraints and as such have nothing to gain from dynamic asset-liability management (ALM) approaches.
The industry reactions that we collected offer a strong rebuttal of these perceptions in that a large majority of the sovereign investment practitioners surveyed manage short-term constraints and implicit liabilities and they believe that the ALM framework provides a better understanding of optimal investment policy and risk management practices. The majority of respondents also recognise the need to hedge endowment fluctuations and endorse the approach put
forward by the foundation paper. This has important potential implications in terms of the emergence of genuinely dedicated ALM and risk management solutions for sovereign wealth funds, the lack of which practitioners lament. Practitioners’ responses also point to the need for further applied research and education with a view to illustrating how the dynamic ALM approach presented can be tailored to a particular fund and its specific model of corporate governance. Voir moins

Financial stability organisations and regulators have been looking into the potential risks of ETFs. The key areas highlighted for attention have been counterparty risk, liquidity risk, systemic risk and possible detrimental impacts of ETFs on their underlying markets, potential risks of innovations such as leveraged and inverse ETFs, and the possibility of confusion between ETFs and other ETPs.
To the extent that such a debate can promote a better understanding of the ETF market and lead to… Voir plus

Financial stability organisations and regulators have been looking into the potential risks of ETFs. The key areas highlighted for attention have been counterparty risk, liquidity risk, systemic risk and possible detrimental impacts of ETFs on their underlying markets, potential risks of innovations such as leveraged and inverse ETFs, and the possibility of confusion between ETFs and other ETPs.
To the extent that such a debate can promote a better understanding of the ETF market and lead to improvements in terms of risk management practices by ETF providers and investors, it is useful.
Unfortunately, the debate on the risks of ETFs has started off on the wrong foot and the initial confusion has been amplified and compounded by competing interests jockeying for position, with adverse impacts not only for the ETF industry but also for the ultimate goals of sound regulation.
In this context, this article looks at the aforementioned issues and makes a number of clarifications regarding the purported risks of ETFs. Voir moins

In the context of the global financial crisis, IASB has been pressured to amend IAS 39 and IFRS 7 to allow financial institutions (mainly banks) to lessen the impact of the crisis on their accounts. EDHEC Business School has voiced concern about this development which it argues misses the point, as it confuses the role of accounting as a source of information and the prudential role of Basel rules for bank capital. EDHEC Business School position is that even if fair value accounting leads to a… Voir plus

In the context of the global financial crisis, IASB has been pressured to amend IAS 39 and IFRS 7 to allow financial institutions (mainly banks) to lessen the impact of the crisis on their accounts. EDHEC Business School has voiced concern about this development which it argues misses the point, as it confuses the role of accounting as a source of information and the prudential role of Basel rules for bank capital. EDHEC Business School position is that even if fair value accounting leads to a cyclical weakening of the fair value of the equity of financial institutions, it is not the accounting standard setter’s job to estimate the amount of additional capital needed or to call for a curtailment of business activity. That is the role of the regulator. Accounting is but one of the means of discerning the true risk profile of a company; its role is not prospective. In addition, by making it possible to treat at historical cost transactions initially treated at fair value, the reform can result in financial statements that contain less and perhaps even erroneous information: historical cost makes it easier to smooth and to manage the accounts in a discretionary way. Such practices are likely to conceal real risk exposure and heighten the mistrust of the financial community, without providing any real benefit to the financial institutions that resort to them.
In this document, we analyse the reception of these reforms on the basis of a global consultation of the financial industry conducted by EDHEC Business School. As part of the insights gathered, we find that less than one-fourth of respondents believe that these amendments are necessary and well suited to resolving the problems of bank solvency whereas three-fourths of respondents believe that they are likely to lead to new problems. Voir moins

This survey takes stock of developments in the real estate investment market, reviews academic evidence on allocation to and management of real estate, and analyses the results of a large-scale, pan-European survey of institutional practices.