Performance Tests of Volume, Insight, and ESG Activity Signals - PowerPoint PPT Presentation

Performance Tests of Volume, Insight, and ESG Activity Signals Global Backtest Results for Truvalue Data, SASB Codified Standard, 2008-2019. OCT 2019

Agenda • Intro to TVL Scores • Backtest Summary • Performance by Region • Portfolio Analytics 2

Intro to TVL Scores

It’s not what companies say, it’s what they do Company Disclosed Information To truly evaluate a company and eliminate ESG “blind spots” requires a comprehensive Truvalue Labs approach. News, NGOs, Watchdogs, Social Media, Trade Journals, Independent Reports 4

Scores on 26 Material SASB categories that impact company value UNIVERSE OF 26 SUSTAINABILITY ISSUES ACROSS 5 AREAS Business Ethics Product Design & Lifecycle Management Competitive Behavior Business Model Resilience Management of the Legal & Supply Chain Management Regulatory Environment Materials Sourcing & Efficiency Critical Incident Risk Management Physical Impacts of Climate Change Accident and Safety Management Human Rights & Community Relations GHG Emissions Customer Privacy Air Quality Data Security Energy Management Access & Affordability Water & Wastewater Management Product Quality & Safety Waste & Hazardous Materials Management Customer Welfare Ecological Impacts Selling Practices & Product Labeling Employee Engagement, Diversity & Inclusion Employee Health & Safety Labor Practices 5

Truvalue Labs creates quantitative signals based on ESG information from unstructured text AGGREGATE EXTRACT ANALYZE GENERATE DELIVER 100,000+ 1 million+ 300,000+ 4 x 26 12 years Multi-language Data points Signals generated 4 key scores and Of history on 16,000+ sources processed monthly monthly 26 ESG metrics monitored companies • Local, National, and • Entity Detection • Event Detection • Company Scorecards • Truvalue Platform International News and Trends • Industry Specific Signal • Spotlight Events • Truvalue Data • NGO Sources, Watchdogs Detection • Portfolio Monitoring • Materiality • Truvalue Index • Trade Journals, Industry • Signal Sentiment Scoring • Investment Opportunities • Truvalue Cloud Specific Publications, • Alpha Twitter ESG Articles 6

Truvalue Labs produces four main scores PULSE SCORE (0-100) INSIGHT SCORE (0-100) TTM VOLUME SCORE MOMENTUM SCORE Captures day-to-day variation, Applies EWMA to Pulse Score, # of articles tagged to SASB Slope of Insight Score over TTM responds to news as it happens provides rating equivalents categories in past 12 months, Identifies companies with for longer-term investors measure of information flow improving or deteriorating ESG Trailing 12 Months 2 Years 7

Now with SASB Codified Edition, Additional Languages, New Signals SASB UPDATED 11 NEW LANGUAGES NEW ESG SIGNALS 16,000+ COMPANIES Updated SASB framework German, Japanese, French, Pipeline 2 performs more Expanded coverage universe to align with codified Italian, Spanish, Portuguese, fine-grained sentiment now covering 29 different standards Dutch, Danish, Finnish, analysis ETFs around the world Norwegian, Swedish 8

Backtest Summary

Insight scores sort global stocks reasonably well on a standalone basis Annualized Active Returns 3 2 1.8 1.61 1.32 0.9 1 0.71 0 Insight 5-Bucket Bucket 1 Bucket 2 Bucket 3 Bucket 4 Bucket 5 10 10

Volume ranks stocks well within each tier of market cap, and the impact of volume is negatively correlated to size Quintiles of Volume within Market Cap Groups 6 5.48 5.5 5 4.5 4 Annualized Active Returns 3.45 3.18 3.5 3 2.67 2.57 2.28 2.5 2.05 2 1.5 1.01 1 0.6 0.5 0.05 0 -0.03 -0.11 -0.5 -1 -0.99 -1.5 -2 -1.77 -1.86 Largest Third of Market Cap Middle Third of Market Cap Smallest Third of Market Cap 1 2 3 4 5 11 11

We construct an Activity Ratio by taking TTM ESG Data Volume and dividing by TTM $ Trading Volume and then rank within countries Annualized Active Returns Activity Ratio = TTM Data Volume / TTM $ Trading Volume 3.5 3.04 3.0 2.58 Activity Rank = Rank of Activity Ratio within each country 2.5 to normalize for differences in trading activity across 2.0 1.35 countries 1.5 1.0 0.49 0.5 Using $ trading volume because it’s a good proxy for typical 0.0 attention a company receives -0.5 -1.0 Not using $ Market Cap directly to avoid building in a -1.07 -1.5 common size factor and introducing valuation tilts Activity Rank Bucket 1 Bucket 2 Bucket 3 Bucket 4 Bucket 5 12 12

Combining Insight with Activity yields a stronger signal that incorporates both ESG polarity and investor attention to ESG topics Annualized Active Returns % 4 3.51 3.04 3 2.58 1.89 1.8 2 1.61 1.35 1.32 0.94 0.9 1 0.71 0.68 0.49 0 -0.58 -1 -1.07 -2 Insight Rank Activity Rank ESG Activity Signal (Insight Rank + Activity Rank) Bucket 1 Bucket 2 Bucket 3 Bucket 4 Bucket 5 13 13

ESG Activity Signal is based on adding (or averaging) Insight rank + Activity rank + 2.57% + 0.95% Insight 0% – 0.26% – 1.52% Activity 14 14

Performance by Region

Performance by global geographic regions Quintile Spread for ESG Activity Signal by Region 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% Global 4.09% North America 4.39% Developed Europe 3.23% Develeoped Asia 3.18% Emerging Markets 4.69% Quintile Spread for ESG Activity Signal by Region 16 16

Global backtest for ESG Insight + Activity Signal 350 Top Quintile Bottom Quintile Benchmark 300 250 200 150 100 50 0 1/02/2008 11/02/2009 9/01/2011 7/01/2013 5/01/2015 3/01/2017 1/02/2019 17 17

North America 400 Top Quintile Bottom Quintile 350 Benchmark 300 250 200 150 100 50 0 1/02/2008 11/02/2009 9/01/2011 7/01/2013 5/01/2015 3/01/2017 1/02/2019 18 18

Developed Europe 250 Bottom Quintile Benchmark Top Quintile 200 150 100 50 0 1/02/2008 11/02/2009 9/01/2011 7/01/2013 5/01/2015 3/01/2017 1/02/2019 19 19

Developed Asia 300 Top Quintile Bottom Quintile Benchmark 250 200 150 100 50 0 1/02/2008 11/02/2009 9/01/2011 7/01/2013 5/01/2015 3/01/2017 1/02/2019 20 20

Emerging Markets 350 Top Quintile Bottom Quintile Benchmark 300 250 200 150 100 50 0 1/02/2008 11/02/2009 9/01/2011 7/01/2013 5/01/2015 3/01/2017 1/02/2019 21 21

Portfolio Analytics

Factor exposures over time: equal weighted 23 23

Factor exposures over time: cap weighted 24 24

Equal weighted vs. market cap weighted Annualized Active Returns 4.0 3.51 3.5 3.0 2.5 2.26 1.89 2.0 1.5 0.94 1.0 0.68 0.5 0.5 0.0 -0.02 -0.08 -0.25 -0.5 -0.58 -1.0 Insight + Activity Equal-Weighted Insight + Activity Cap-Weighted 1 2 3 4 5 25 25

Sector exposures over time: equal weighted 26 26

Sector exposures over time: cap weighted 27 27

Global sector-neutral performance is similar (and slightly better than country neutral in some regions) Annualized Active Returns 4 3.51 3.38 3.5 3 2.5 1.89 2 1.51 1.5 1.11 0.94 0.85 1 0.68 0.5 0 -0.5 -0.45 -0.58 -1 -1.5 -2 Insight + Activity Country Neutral Insight + Activity Sector Neutral 1 2 3 4 5 28 28

ESG Activity Factor is additive Five-factor Smart Beta includes size, value, price momentum, quality, and minimum volatility. to Smart Beta strategies Annualized Active Returns 4 3.51 3.5 3.2 3 2.39 2.32 2.5 1.89 1.79 2 1.75 1.71 1.5 1.01 0.94 1 0.68 0.68 0.5 0 -0.5 -0.58 -1 -1.5 -1.3 -2 -1.7 Insight + Activity Country Neutral 5-Factor Smart Beta CN Insight + Activity + Smart Beta CN 1 2 3 4 5 29 29

Quarterly rebalancing also works well Annualized Active Returns 4.0 3.76 3.51 3.5 3.0 2.38 2.5 1.89 2.0 1.5 1.27 0.94 1.0 0.68 0.66 0.5 0.0 -0.5 -0.28 -0.58 -1.0 Monthly Quarterly Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 30 30

Global risk-return profile I*A Country Neutral Quintile Universe Return Standard Deviation Return Return / StdDev Benchmark 7.75 21.17 0.37 1 9.40 21.89 0.43 2 9.19 21.39 0.43 3 7.40 20.80 0.36 4 7.29 21.72 0.34 5 5.50 20.79 0.26 31 31

Thank you sales@truvaluelabs.com