Asset4 Enriches Risk Assessment
A careful study of the board of directors' résumés at Swiss bank UBS (UBS) might have raised some warning flags prior to its eye-popping writedown of $37 billion in bad assets. The UBS board, which is now being strengthened, was less experienced, independent, or knowledgeable about finance than those of many peers—factors that may have contributed to the bank's lack of adequate risk-management measures.
While not easily quantified or strictly predictive, such nonfinancial information is becoming increasingly important to investors trying to pick where to place their bets. Whether it's corporate governance, environmental exposure, labor policies, or community relations, these "softer" factors can play as large a role as return on equity or capitalization ratios in the future performance of a company and its stock.
Hungry for help sorting out these issues, asset managers, banks, and hedge funds are turning to a European pioneer called Asset4, based in Zug, Switzerland, that bills itself as the Bloomberg of "extra-financial" corporate metrics. Though not the only outfit to track and analyze such information, Asset4 has soared in recent years thanks to the depth and breadth of its data and the perceived neutrality of its analysis.
Asset4 tracks all manner of revealing statistics. Using its database, for instance, investors can benchmark the ratio of carbon dioxide emissions to revenues for the world's top 10 oil companies to figure out which may be the most exposed to toughening greenhouse gas regulations. Likewise, Asset4 shows which companies rank highest on worker safety, human rights, or quality certifications like the International Standards Organization's ISO 9001.
The Bottom Line
"If you only look at financials, you don't have a complete and holistic view of the risk profile," says Henrik Steffensen, a 42-year-old Dane who co-founded Asset4 in 2003 and now serves as its vice-president for marketing and business development.
Such metrics can and do translate to the bottom line. Consider Dutch logistics giant TNT (TNT.AS), which scores highly in Asset4's measurements for worker health and safety. Not surprisingly, the company has a lower number of accidents and injuries than its rivals—which has led to rising employee satisfaction and growing earnings and dividends per share.
Asset4's theory and technology have attracted attention from the biggest players in finance. Among the earliest to buy in was Goldman Sachs (GS), which not only participated in Asset4's first round of financing but also incorporated the startup's data and framework into its own investment research, portfolio monitoring, and risk management. Goldman Sachs is now marketing the Asset4 system to its global client base.
Merrill Lynch (MER) also invested in Asset4 last September in return for a minority equity stake, and in April launched Merrill Open Minds, a research service for its clients that includes data from Asset4. Henrik Steffensen and Asset4 co-founder Peter Ohnemus, a 43-year-old dual Swiss and Danish national who serves as the company's chief executive officer, have put in their own money, as has Alan Parker, one of the founders of Duty Free Shops (LVMH.PA). Asset4 won't disclose how much it has raised from these investors.
The idea for Asset4 came when Steffensen and Ohnemus, a tech industry veteran, were running a small Swiss investment boutique called E-firm. The two men found that the value of the companies they were investing in often wasn't adequately reflected on their balance sheets, so they set out to develop a new methodology for evaluating risk and opportunity. That led to the creation of a vast database spanning 250 factors from environmental policies to social and governance issues—known in industry parlance as ESG.
To add credibility to their model, Steffensen and Ohnemus submitted it for testing and analysis to third parties including the Swiss Federal Institute of Technology, the Lausanne-based International Institute for Management Development (IMD), and the Copenhagen Business School. (IMD professor Ulrich Steger now sits on Asset4's board of directors.) Today, Asset4's database contains information on almost 2,500 top companies that together account for about 60% of worldwide stock trading volume.
The attraction for a customer—and investor—like Goldman Sachs is clear. "There is a strong appetite from investors for nontraditional metrics and evaluation that go beyond general financials," says Raj Mehta, executive director for principal strategic investment in Goldman's London-based securities division. "Price-earnings ratios and cost-to-income are not sufficient to predict how a company will perform in the future." Mehta is especially keen on information about issues such as corporate governance and social responsibility, which, he says, "influence how the world and the markets will experience the companies and how investors will make money on the back of them."
A Growing Appetite
Asset4 already counts among its marquee clients BNP Paribas Asset Management (BNPP.PA), Société Générale (SOGN.PA), Axa Investment Managers (AXA), and Switzerland's Bank Sarasin (BSAN.MU), which launched one of the world's first investment funds based on the concept of eco-efficiency. Other users include Canadian socially responsible investment manager Ethical Funds and the pension funds of Royal Dutch Shell (RDSA), Philips Electronics (PHG), and the State of New Jersey.
There's no question appetite is growing for innovative services such as Asset4's. Funds handling over $4 trillion in assets have signed on to a set of six principles put forth by the U.N.'s Responsible Investing Initiative, which calls for pension funds, asset managers, and mutual funds to integrate ESG into their research and investment decision-making. To meet the demand, other firms such as Britain's Maplecroft benchmark corporate performance and analyze risk in economies around the world.
To be sure, such information needs to be used in conjunction with traditional financial metrics in making investment decisions. "ESG measurements have only been taken for about four years, but we are starting to get a larger set of information that indicates trends in the marketplace," says Goldman's Mehta. "The data will get sharper and smarter as time goes on."