Record Currency Management (Record) has developed a method of improving the environmental, social and governance (ESG) credentials of its Multi-Strategy currency product whilst preserving the return profile, enabled by one of the largest sets of country-specific ESG data built to date.
As part of its drive to incorporate ESG factors into active currency products, Record has worked in collaboration with Oxford-based researchers to extend the boundaries of ESG to encompass the currency markets, from its existing base in bonds and equities.
The process applies insights on the relationship between productivity and exchange rates, gained from over 30 years of data from Record’s existing products, to the information contained in the database. The result is a range of currency-relevant ESG factors related to the United Nations Sustainable Development Goals. These factors (for example education, child mortality, improved water sources and enforcement of legal contracts) are used to construct an ESG metric which tilts the Multi-Strategy currency portfolio in a pro-ESG manner. Record is seeding this strategy with its own money and will offer it to clients in due course.
At present, the database includes approximately 200 countries, with more than 1,600 separate series, dating in some cases as far back as 1960, and has been derived from multiple sources. This builds on Record’s initiatives in incorporating ESG issues into its business and currency management, including its June 2018 announcement that it is one of the first currency managers to have been accepted as a signatory to the Principles for Responsible Investment.
Record intends to collaborate with selected clients who might wish to apply the methodology to reflect their own specific ESG views, and also with research institutes. Record will continue to develop the database as more material becomes available, in particular from developing countries.
“From our existing investment strategies, we know that there are links between currency returns and productivity gains,” says James Wood-Collins, Chief Executive at Record. “Therefore we have focussed on those ESG factors most clearly related to economic productivity and, as there is more ESG variability between the emerging markets (EM) economies than the developed ones, designed an ESG process which tilts the EM currency strand of the Multi-Strategy product towards ESG currencies. We believe that well-managed countries can take advantage of currency inflows, via lower cost of capital, to make investments that increase their productivity.”
“We see this not only as part of our in-house research effort, but also as part of a contribution we can make to furthering ESG investment around the globe. We hope we can open doors to new ways of thinking about ESG and incorporating these into currency thinking and investment alongside equity and bond strategies.”