Mr Schneller is an experienced client-facing quantitative researcher, having been a senior member of the Research Group and Investment Solutions Group at Dimensional Fund Advisors since 2017, a leading factor-based asset management firm. During his time with Dimensional Fund Advisors, Warwick led research initiatives and provided thought leadership, analysis and client education on a wide range of investment-related topics across Australia and New Zealand.

Susan Rodgers said Mr Schneller brings strong academic credentials along with senior investment research and strategy experience in systematic equities, which he has achieved locally and internationally.  “It is exciting to have Warwick join the Sydney office, to help me continue the expansion of Scientific Beta’s footprint in the region. I’m thrilled at his appointment,” she said.

“As a senior member of the Investment Specialist Team at Scientific Beta, Warwick will work closely with research, index construction, and business development, linking investors to Scientific Beta’s global leading research and index design capabilities,” she said.

“In addition to Warwick’s appointment, Scientific Beta is expanding its business in Australia. As an example of that, Future Group has formed a new partnership with Scientific Beta in Australia to develop an international equities strategy that is aligned with sustainable investment principles and members’ best financial interest.”

Mr Schneller holds a Ph.D. in Finance from The University of New South Wales and is a CFA charterholder. His educational background includes a Masters in Finance from Bond University and a Bachelor of Agricultural Economics (Hons) from Sydney University.  Additionally, Mr Schneller is an adjunct lecturing in finance at the University of New South Wales. Warwick is a frequent speaker at conferences and client events. His earlier career included forex trading at Macquarie Group.

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Daniel Aguet

Global index provider Scientific Beta has welcomed new Australian laws which will force large organisations including financial institutions to adopt mandatory climate disclosures. 

ASIC has urged businesses to prepare for this mandatory climate reporting (24 – 205MR)^[1] and says climate disclosures will grow in importance as more people consider environmental sustainability when making financial decisions.

From 1 January 2025, many large Australian businesses and financial institutions will need to prepare annual sustainability reports containing mandatory climate-related financial disclosures, following the recent passage of a major bill through Parliament. The legislation regulates how large businesses, and financial institutions report on climate-related risks and the integration of these risks into their decision-making processes. 

From 1 January 2016, the new laws will apply to asset owners with more than $5 billion in assets under management, including superannuation funds. The law brings Australia into line with global reporting frameworks and boosts transparency on climate disclosures in the boardroom and on balance sheets.

“The new mandatory corporate climate reporting laws being introduced by the Australian government are a key step towards improving transparency and capital allocation in financial markets, in a context where investors have much to lose from climate change,” said Daniel Aguet, Deputy CEO and Index Director of Scientific Beta.  

“Investors are right to be very concerned by the impact of climate risk on equity valuations. Analysis conducted for  Scientific Beta-EDHEC Research Chair indicates that over 40% of global equity value is at risk if decarbonisation efforts do not accelerate, with losses exceeding 50% when climate tipping points are factored in. Prompt and robust action by regulators and companies is needed to keep losses below 10%,” Mr Aguet said.

“We welcome the action by the Australian government to bring local laws into line with those already in place in the UK, New Zealand, and the EU. When investing in assets that are at risk of significant loss from climate impacts and policies, investors need improved corporate disclosures to understand which companies are most at risk, and which stand to benefit.

“Now, with better corporate reporting that will be brought about by these new laws, investors can also more accurately steer their capital towards those companies making the most efforts to transition, and to those offering climate solutions.”

Mr Aguet said ASIC is right to stress the importance of improved corporate climate disclosures that the new laws bring. “Communicating standardised and publicly available raw data straight from the source is far more useful for investors than opaque, proprietary scores on ESG ratings from data vendors. Indeed, research from Scientific Beta has shown that ESG scores diverge significantly from one provider to another, and are largely unreliable,” Mr Aguet said.

———

Notes:
[1] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-205mr-asic-urges-businesses-to-prepare-for-mandatory-climate-reporting/

Further reading:
Scientific Beta’s position on ESG data, please download our white paper Can We Make ESG Scores Great Again?: https://docs3.scientificbeta.com/Library/External/White_Papers/Can_We_Make_ESG_Scores_Great_Again

How Does Climate Risk Affect Global Equity Valuations? A Novel Approach, EDHEC-Scientific Beta Research Chair: https://www.scientificbeta.com/download/file/how-does-climate-risk-affect-equity-valuations

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Daniel Aguet

Following the Australian Prudential Regulation Authority’s (APRA) recent announcement^[1] regarding significant improvements in performance test outcomes for superannuation funds and introducing new product performance metrics, Scientific Beta has emphasised its commitment to providing cost-effective investment solutions with a strong focus on risk management.

The Australian Prudential Regulation Authority (APRA) has recently released a comprehensive package of product performance metrics and insights to increase transparency and sharpen superannuation trustees’ focus on improving superannuation member outcomes.

APRA’s Comprehensive Product Performance Package (CPPP) comes after it reported last month a significant drop in the number of MySuper and choice products that failed the performance test in 2024 (37 down from 97) with 52 products that failed the 2023 performance test exiting the market.  The CPPP covers 876 MySuper and choice products.^[2]

“While the performance of superannuation products has improved following the introduction of the performance test, there are still underperforming products that need improvement, particularly in terms of risk management,” said Daniel Aguet, Deputy CEO and Index Director of Scientific Beta.

“This underscores the importance of robust risk-controlled strategies for retirement savings, which aligns with Scientific Beta’s Market+ framework. This framework allows investors to pursue outperformance and sustainability goals while maintaining tight control over benchmark-relative risk,” he said.

“Scientific Beta’s Market+ framework offers tailored solutions for investors aiming to achieve financial outperformance and sustainability objectives, all while maintaining close alignment with standard market benchmarks,” he said.

For investors with limited risk budgets, the Market+ framework offers a reliable and transparent approach. By focusing on portfolio-level risk management and avoiding potentially unreliable stock-level optimisations, it allows for the efficient integration of financial and sustainability objectives, according to Mr Aguet.

“The advantage of Market+ Indices is their ability to integrate a variety of goals within a robust and transparent framework. When it comes to sustainability drivers, we avoid using opaque and unreliable ESG ratings, which diverge significantly across data providers on seemingly identical measures.

“Instead, we focus on verifiable fact-based climate measures that do not rely on crystal balls, such as forward-looking climate transition risks, green revenues based on regulated taxonomies, and science-based targets. Our factor strategies are designed to target exposures to academically validated risk factors that provide rewards over the long term in a systematic and risk-controlled approach. This enables an efficient capture of their return premium through time.”

Regarding the effective management of tracking error, Mr Aguet said that traditional optimisation approaches rely on stock-level risk estimates, which are noisy, leading to estimation errors.

“Our risk management framework allocates between the investor’s unconstrained index—including financial and/or sustainability goals—and a cap-weighted index to achieve the maximum of their goals within their risk budget. By employing a robust statistical model at portfolio-level to forecast tracking error, we avoid the pitfalls of inaccurate and opaque stock-level optimisations.”

Mr Aguet emphasises the importance of transparency in the Market+ methodology: “Each objective serves as an independent building block, which we aggregate into the final index to precisely meet the tracking error target. This structure ensures that our indices are fully transparent, providing clear insights into how each component contributes to the overall strategy. As the regulatory landscape continues to evolve and sharpen, Scientific Beta remains dedicated to assisting investors, including superannuation trustees, in achieving their investment objectives, at a low cost.”

——–

Notes:
[1] https://www.apra.gov.au/news-and-publications/apra-releases-performance-metrics-and-insights-package-to-improve
[2] Ibid.

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Daniel Aguet

ASIC’s recent report on its interventions against greenwashing misconduct for the 2023–2024 period (REP 791)^[1] understates the need for improvement on ESG ratings, which often mislead consumers regarding the measurement of the sustainability of investment products.

ASIC said in its report that “our surveillance indicates there is ample room for improvement”.

Daniel Aguet, Deputy CEO and Index Director of Scientific Beta said “the report underlines the extent of greenwashing prevalent among investment managers and ASIC has proven itself as one of the most active watchdogs internationally. Nevertheless, the regulator’s work also has room for improvement, especially when it comes to the use of ESG ratings”.

“Sustainability-related information, like any other, should be accurate, based on reasonable grounds and be easily understood by investors,” said ASIC Commissioner Kate O’Rourke.

However, many investors use so-called ESG ratings, which bundle together many criteria, often qualitative, to create investment products and inform investors about their sustainability features. Qualitative research can be highly subjective, with conclusions relying primarily on researchers and their interpretation and analysis of the data.

“ESG ratings typically fail ASIC’s three information quality standards”, said Mr Aguet. “They are not accurate, not reasonably grounded and not understood by investors”.

ESG ratings diverge from one rating agency to the other, undermining their credibility as accurate and objective metrics.

The CEO of MSCI, the market leader for such ratings concedes as much in a recent interview with the Financial Times saying that “an ESG rating is an opinion … we are going to arrive at different opinions, we are going to arrive at a different rating”.

In a 2022 policy recommendation “to improve the transparency and credibility of ESG rating methodologies and promote market integrity”, the OECD “finds that despite progress, ESG approaches suffer from considerable shortcomings with respect to consistency, comparability and quality of data and transparency of associated methodologies that undermine their broader use and the trust of investors”.

Moreover, beyond being inaccurate, investors do not even understand what these ratings are intended to convey. According to a Bloomberg BusinessWeek article “[MSCI’s CEO] concedes ordinary investors piling into such funds have no idea that his ratings, and ESG overall, gauge the risk the world poses to a company, not the other way around. ’No, they for sure don’t understand that,’ he said in an interview last November. “I would even say many portfolio managers don’t totally grasp that’”.

In line with this admission, the OECD states that “greater clarity on the high-level purpose of elements in ESG ratings is warranted”.

“Until ESG ratings reasonably accurately measure what their providers intend them to measure, and until investors understand what these intentions are, ESG ratings are a source of investor misinformation,” Mr Aguet said.

Read the Whitepaper.

——–

Notes:
[1] https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-791-asic-s-interventions-on-greenwashing-misconduct-2023-2024/

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Erik Christiansen

Investing in emerging markets (EM) equities offers diversification and adopting a multi-factor approach provides access to well-grounded return premia, while significantly reducing volatility, according to new figures from global index provider and research house Scientific Beta.

These additional return benefits are demonstrated in the long term, but also in more recent years. While the outperformance over standard cap-weighted benchmarks has been above 3% p.a. in the last two decades, it has been above 7% over the last one and three years.

“The attraction of investing in EM is multifaceted,” said Susan Rodgers, Scientific Beta’s Business Development Director for Australia and New Zealand.  “EM economies generally experience faster growth compared to developed markets (DM), which can potentially lead to higher returns on equities, albeit with higher volatility. Over the period since 2001, EM equities have outperformed developed markets on a cumulative basis. Furthermore, this asset class provides diversification benefits to investors, as its returns have shown low correlation with those of traditional asset classes.”

“Our multi-factor EM strategy has outperformed the broad cap-weighted benchmark with lower volatility over the short and long term,” said Erik Christiansen, Head of Investment Solutions for Scientific Beta, as displayed by the performance table below.

Included in the multi-factor strategy are six well-established equity factors: value, momentum, size, low volatility, profitability, and low investment. “These factors have been critically reviewed and judged robust by financial practitioners and academics and have consistently delivered reliable and well-documented systematic premia across various geographical and market settings,” he said. “In addition, these factors are independent from one another, offering a powerful toolkit for crafting an EM equity factor strategy that can deliver robust returns to investors.”

Scientific Beta’s four-step investment process involves constructing factor-specific portfolios, avoiding negative exposures to rewarded factors by enhancing factor intensity, promoting diversification, replicability and investability by the use of liquidity rules, and equally weighting factor-specific portfolios to benefit from their decorrelation.

As the table below shows, while trading costs remain higher in Emerging Markets than in Developed ones, the trading costs of a multi-factor strategy are an order of magnitude lower than the return benefits it brings.

“This approach enables us to build an EM multi-factor portfolio with strong and well-balanced exposures to all six rewarded factors, which delivers robust risk-adjusted performance over the long-term. In addition, an EM multi-factor investment strategy delivers a well-balanced portfolio, leveraging the benefits of decorrelation and the cyclicality of premia.”

“Importantly, our high factor intensity filter removes companies that score poorly on a multi-factor score. The result is to meaningfully raise the factor intensity, by avoiding the dilution effect of stocks that are winners on one factor but bring negative exposures to the others. This approach proves particularly valuable in a multi-factor portfolio, where investors seek exposure to all rewarded factors to improve returns compared to market-capitalisation-weighted indices,” he said.

Scientific Beta builds its indices within regional building blocks, with separate underlying portfolios for example for India and China. This enables accommodating investors who wish to finetune their geographic exposures, such as with an Emerging ex-China approach.

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A new study from global index provider and research house Scientific Beta, Green Dilution: How ESG Scores Conflict with Climate Investing^[1], provides clear evidence of the dangers for investors of mixing ESG and carbon scores in equity portfolio weighting schemes, as it can come at great carbon cost for green investors.

“The green dilution is very strong, regardless of which ESG factors and scores are targeted as objectives, with our research revealing an average dilution of 92% across our portfolios,” said Erik Christiansen, Head of Investment Solutions for Scientific Beta.

“In other words, adding combinations of ESG scores to carbon intensity as a weight determinant in developed equity portfolios dilutes 92% of the initial carbon reduction objective. Only 8% of the carbon reduction objective survived the inclusion of ESG scores in portfolio weighting schemes,” said Mr Christiansen.

The green dilution has a simple explanation: the correlation between ESG scores and carbon intensity is close to zero.

“The two objectives are, simply put, unrelated. By adding too many ESG factors, investors lose focus on the carbon reduction objective. So if you are seeking to reduce the carbon intensity of your portfolio, you need to prioritise the decarbonisation objective,” Mr Christiansen said.

The Scientific Beta research reveals that the lack of correlation between carbon intensity and ESG scores holds true even if companies’ carbon intensity — their carbon emissions per unit of revenue or market capitalisation — is compared to their environmental rating.

“ESG ratings have little to no relation to carbon intensity, even when considering only environmental factors underpinning ESG ratings,” said Mr Christiansen.

Scientific Beta’s analysis is extensive, having included 25 different ESG scores from three major global ESG rating providers.

“Even just using environmental scores, rather than a range of ESG factors, leads to a substantial deterioration in carbon performance. You get a worse outcome by mixing social or governance ratings with carbon intensity objectives, which typically results in creating portfolios that are less green than the comparable market capitalisation-weighted index.  In other words, including social and governance scores more than completely reversed the carbon reduction objective,” Mr Christiansen said.

This dilution can be avoided through a separation approach, whereby ESG scores are used only for screening whether companies are included in a portfolio, then using carbon metrics to determine the portfolio weights.

“This conclusion arises naturally from the fact that ESG ratings and carbon intensity metrics are unrelated to each other. Our findings are robust across different ESG ratings providers, different carbon metrics and emission scopes, and different portfolio weighting schemes.”———–

Notes:
[1] Green Dilution: How ESG Scores Conflict with Climate Investing

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Michael Aked

Scientific Beta, an equity index provider in the ESG and Multi-Factor investment arena, has challenged the conventional belief that investing in companies or portfolios with high ESG green scores guarantees excess returns or even significant climate impact.

The international index provider has brought its knowledge from Europe to Australia and says that on the surface, ESG portfolios may indicate outperformance, but they’re not moving the dial on achieving climate goals.

Since 2015, Scientific Beta has been providing cutting-edge strategies in the realms of ESG and climate change. In addition to its in-house research efforts, Scientific Beta actively backs a significant research endeavour led by EDHEC focused on ESG and climate investing.​

During this period, Scientific Beta has developed three principles of climate impact investing anchored on the fact that green alpha is an illusion, directly challenging the damaging status quo that you can save the planet and deliver higher returns for investors.

Michael Aked, senior investment strategist at Scientific Beta, stated the firm is a strong supporter of ESG investing given its European roots but warns that the science behind green alpha is not robust and fraught with data mining. Mike agrees that it will not lower investors’ returns either.

“Many investors have been led to believe that green portfolios will lead to greater investment returns. This runs the risk that investors will be held hostage to ways and means of investment managers. We suggest investors outline their impact objective first and then require investment managers to deliver traditional investment returns within the investor’s impact targets,” explained Mr. Aked.

Aked believes there are three principles investors should follow when it comes to climate impact investing:

• maximise your impact objectives – understand the motivations and language for low-carbon investing and find the balance between company engagement and divestment
• green alpha is just an illusion – assess your value-added when accounting for sector exposures, downside risk and trends or shifts, and
• don’t let your impact be greenwashed away – evaluate whether your portfolio sends clear messages to company decision-makers.

“To realign key sectors with climate goals, we need to allocate capital selectively within and across sectors, championing climate change leaders and incentivising progress,” Mr. Aked concluded.

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Michael Aked

Scientific Beta, a trailblazer in managing net zero portfolios in Europe, is now collaborating with superannuation funds to extend its expertise to the Australian market. This objective is to empower Australian super funds with the tools and knowledge required to effectively navigate the complexities of decarbonising their portfolios while adhering to the demanding Your Future, Your Super (YFYS) regulations – a multi-faceted and urgent endeavour.

Superannuation funds in Australia, including some of the nation’s largest, have made ambitious commitments to align their investments with net zero objectives. In Europe, the regulator has clear rules that must be fulfilled if an investor is going to claim such lofty net zero goals, best embodied in the EU Carbon Transition Benchmark regulatory framework. The core commitment of the European framework requires an annual reduction in the carbon intensity of pension funds’ equity portfolios of 7%, a goal that presently appears challenging for Australian superannuation funds to attain. Many of these funds continue to allocate significant portions of their members’ funds to high-carbon Australian and international companies without making clear to these companies if they do not decarbonise fast enough then divestment must be the repercussion.

Michael Aked, Senior Investment Strategist at Scientific Beta, stated that the EU CTB framework is being adopted by many investors around the world including in New Zealand.​

Mr. Aked emphasised the predicament that super funds find themselves in due to their strict adherence to Your Future, Your Super (YFYS) performance testing.​

“Super funds are essentially walking a tightrope. YFYS performance testing imposes tracking error targets that tether them to high-emitting Australian companies, hindering their ability to achieve both satisfactory returns and an acceptable rate of decarbonisation,” explained Mr. Aked.

One unintended consequence of YFYS regulations is to restrict fund investment behaviour to continue to fund high carbon emitters regardless of their ESG performance.

Unlike Europe, where low-carbon benchmarks are readily available, the absence of a YFYS-compliant low-carbon benchmark in Australia leaves super funds with few viable options. Mr. Aked outlined two paths available to super funds:

• Comply with YFYS: Fulfil their YFYS obligations but risk allegations of greenwashing for making net zero commitments they may not fulfil.
• Pursue net zero commitments: Invest in line with their net zero commitments but prepare for potential repercussions if they fail the YFYS performance test, which could lead to significant regulatory action.

“This presents an exceedingly challenging scenario for super funds, as both options expose them to regulatory scrutiny, jeopardising members’ funds and eroding trust,” Mr. Aked emphasised.

Scientific Beta recommends a proactive approach to navigate this dilemma. According to Mr. Aked, the optimal solution is for super funds to publicly commit to a 7% annual decarbonisation targets that requires forced divestment of carbon laggards. Only if Australian companies risk losing capital from our super funds will they see the importance of acting annually and with the required magnitude to meet net zero 2050 goals.

“In essence, super funds can opt to stay the course and employ the coercive power of forced divestment to compel companies to meet their decarbonisation targets, thereby driving meaningful change,” Mr. Aked concluded.

“Scientific Beta’s established track record in Europe positions us to provide invaluable guidance to Australian superannuation funds grappling with the challenges of net zero portfolio management. Our expertise will prove instrumental in assisting them on this critical journey.”​

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