As investors look beyond earnings and balance sheets to evaluate companies, they're turning to artificial intelligence screening tools to find long-term winners and avoid catastrophic losers.
One such tool is the S-Ray scoring system made by Arabesque, a firm that specializes in scrutinizing environmental, social, and governance (ESG) news and other factors. The Inquirer asked the Frankfurt, Germany-based company to rank the largest of our Philly Ticker index companies, which tracks public companies in the region.
The idea is that high scores on such issues as corporate transparency, board diversity, public perception, and sustainable environmental practices lead to rising stock values and more profitable investments over time — and protect investors from massive meltdowns like the unfolding consumer fraud imbroglio at Wells Fargo.
Arabesque's S-Ray is an unbiased diagnostic technology that uses thousands of data points to evaluate companies with two scores:
What is the main difference between the GC and ESG scores, for a layperson? GC scores measure how a company behaves in society; ESG scores measure how well a company manages business risks.
So how did the Philadelphia-area companies rank? The scores may surprise you.
Among the top-ranked companies on an environmental, social, and governance basis, according to Arabesque's S-Ray tool: SAP led with a total score of 70 out of 100, followed by TE Connectivity, American Water Works, Boeing, Prudential Financial, EPAM Systems, AstraZeneca, Knoll, South Jersey Industries, Merck, and Exelon.
Among the top-ranked companies on a GC score basis: SAP ranked first on the list, with a score of 70.26 out of 100, followed by American Water Works, TE Connectivity, AstraZeneca, Johnson & Johnson, DowDuPont, FMC Corp., Campbell Soup, Merck, and Shire PLC.
Among the lower-ranked on the ESG scores: Medical device and supply company Teleflex Inc., BioTelemetry, AgroFresh Solutions, Unisys Corp., Entercom Communications, Triumph Group, Lannett Company, Teva Pharmaceutical, Genesis Healthcare, and Navient Corp., the student-loan servicing company, with the lowest score of 24.68 out of 100.
Entercom, for instance, is a local media firm that bought all of the CBS Radio stations across the country. The family-controlled Entercom improved its S-Ray inputs such as shareholder engagement and transparency, but its score worsened due to poor compensation and audit committee independence, and high employee turnover.
And among the lowest-ranked on the GC scores: Univest Corp. of Pennsylvania, Hamilton Lane, Nutrisystem, Bryn Mawr Bank, AgroFresh Solutions, Trevena, PHH Corp., Entercom Communications, Genesis HealthCare, and Navient with the lowest score of 36.66 out of 100.
For example, DowDuPont's energy efficiency improved, but its customer satisfaction dragged down its ranking.
Navient's strategy objectives improved over the last year, but its score was pulled down by lawsuits and troubling affiliations of board members.
Arabesque's tool, launched to the public in 2017, allows investors, regulators, public companies, and consumers to monitor the sustainability of around 7,000 of the world's largest corporations. Arabesque S-Ray "is designed to streamline vast amounts of environmental, social, and governance information into one application," said Andreas Feiner, Arabesque's head of ESG research and advisory team.
We also highlighted Philadelphia companies with scores that improved the most over the last year, including Univest Corp. of Pennsylvania, whose ESG score rose 28 percent, to 47.94, mainly on improved governance, data show. Univest is the publicly traded parent company of Univest Bank and Trust as well as insurance, investments, and equipment-financing arms.
EPAM Systems topped the most-improved for GC scores, up 23 percent to 55.83 over the past year. EPAM improved in the rankings based on human and labor rights, the environment, and anticorruption measures, the data show. Based in Newtown, Bucks County, EPAM is the New York Stock Exchange's eighth-largest software company, founded by Arkadiy Dobkin.
Paul Smith, CFA, president and CEO of the CFA Institute, agrees that ESG factors "will be essential for any company going forward. Just ask Mark Zuckerberg at Facebook. ESG needs board oversight and managerial cooperation," he told a panel in New York this year.
Arabesque uses the tool to run its own in-house mutual fund, and is a quantitative asset manager that uses self-learning quantitative models and big data to assess the performance and sustainability of companies. The Arabesque Systematic USA Fund (ASUIX), started in 2017, has risen roughly 18 percent over the last year, vs. roughly 14 percent for the S&P 500. Through machine learning, Arabesque S-Ray combines over 200 ESG metrics with news signals from over 50,000 sources across 15 languages. So-called impact investors, measures like these can be useful as an overlay or extra layer of analysis.
For instance, Arabesque's fund managers avoided investing in Wells Fargo.
"We didn't hold Wells Fargo in any portfolios due to our process. Nor did we own Volkswagen or SunEdison or Kobe Steel," all plagued by scandal in recent years, Feiner said. "It's really helped avoiding very risky companies. If you boil it down to why we excluded them? They had low ESG or GC scores," Feiner explained.
Sometimes a company like Philadelphia's FMC Corp. can earn a high ESG score and a low GC score — presenting investors with a quandary. FMC ranks in the top 10 percent for GC and the bottom third for ESG — meaning there's a disconnect between how they're behaving and how they're run. Teva Pharmaceuticals presented the same mixed results, with a low ESG score and a high GC score.
Philly Ticker companies were compared with a universe of the 500 largest public companies trading in the U.S., and the Philadelphia portfolio posted an average score of 48.94 for ESG, compared with 54.93 for the larger universe. For GC scores, the Philadelphia portfolio average totaled 53.56, compared with the average of 58.87.
Arabesque isn't the only firm issuing sustainability rankings for investors. Competitors include Sustainalytics and MSCI. Arabesque currently has clients including Japan's state pension fund, State Street, Bank of New York Mellon, and Deutsche Bank, where it launched the Solactive Sustainability Index Europe which is based on S-Ray scores.