Systematic investor, Acadian Asset Management LLC, has developed an automated system to identify greenwashing in potential investment targets.
Greenwashing occurs when organisations make unsubstantiated claims about their ethical and/or environmental practices.
Acadian, a leader in global systematic investing with A$156 billion in assets under management as of June 30, 2021, harnesses artificial intelligence to better screen public companies’ green credentials.
Andy Moniz, Acadian’s director of responsible investing who is based in their UK affiliate, said: “Quants are ideally suited to identifying greenwashing because they are data-driven. This new system enables us to analyse significant amounts of both structured and unstructured data.”
Acadian uses ESG signals drawn from text mining of sustainability reports, regulatory filings, shareholder proposals and other company data. Signals range from the identification of physical and transition climate risks, discussions of employee well-being and corporate culture during the COVID-19 pandemic, to human rights and supply chain concerns.
Acadian’s system cross-checks what companies say in their annual shareholder meetings, filings and earnings calls, versus their actions, as tracked through corporate policies and sustainability reports.
“We’re merging these datasets together to identify companies that talk a lot about sustainability but perhaps don’t actually do much,” said Dr Moniz. “The premise being that a company’s actions speak louder than its words.”
“In the case of earnings calls, we identify evasive and potentially deceptive talk,” he said. “Our text mining algorithms assess to what extent managers are directly answering sell-side analysts’ sustainability questions or giving a boilerplate response or an indirect answer.”
He said the greenwashing model rewarded answers that included quantitative metrics and targets, forward-looking views or that focused on opportunities. It penalised vague or backward-looking statements and those that emphasised risks.
For example, Dr Moniz noted how Acadian tracked whether companies that expressed concern for their employees’ wellbeing during the COVID-19 pandemic was consistent with their behaviour. “We correlate what companies are saying versus information from online reviews and Web data to gauge corporate culture,” he said. Acadian then engages with firms that it suspects of failing to live up to their promises. If the firm provides generic responses, its engagement team follows up on specific questions to company management.
