October 12, 2021
It’s been a long time in coming, but many of the world’s largest asset managers, forward-thinking family offices, and individual investors are developing and implementing sustainable investment strategies that seek to couple competitive financial returns with wider environmental and social benefits.
Some are building their own databases, developing their own analytical capabilities, and creating their own rating systems. Others are turning to new, purpose-built, and easily integrated platforms to understand, track, measure, and report on the impact of their investments.
Physis Investment offers one such platform. It was founded to ensure environmental, social, and governance dimensions are the focal point of investment decision-making. Physis offers detailed ESG analysis and expanded ESG scores, enhanced Sustainable Development Goal (“SDG”) monitoring including 100+ SDG specific impact indicators, and increased impact reporting capabilities using a combination of external data and internal research. Users can easily screen, filter, and interpret the available data by issuer, fund, sector, or SDG, and create and share sustainable data reports directly with clients and others.
Physis utilizes more than 15 sources of data to deliver insights on more than 10,000 securities and more than 25,000 investment funds, and for 198 countries. Physis also supports regulatory and client reporting to help investors meet new sustainability disclosure obligations and support both SFDR and EU taxonomy regulations.
Founded in 2019 in Boston by Stefania Di Bartolomeo, a former fund manager, Physis is backed by angel investors* in the U.S. and Italy and currently consists of a team of 15. Physis has been virtual and global from the start.
Q. Stefania, is ESG investing a matter of managing risk or of identifying opportunity?
A. When ESG was born, it was mostly a matter of risk reduction. But as we progressed, the world understood that ESG is more about opportunity. ESG has transitioned from a risk goal to an opportunity goal which is what investing is all about. It’s to capture the upside of emerging opportunities.
With this in mind, at Physis we decided to develop new research on sustainable products and services that no one else has. We have developed enough research to capture those trends and to understand which companies may be better prepared for the future. We feel strongly that companies progressing toward more sustainable products and services will win market share.
Q. So then the answer to my next question is, yes, you can use ESG to add Alpha to your investment portfolios.
A. Exactly. ESG is a way to generate alpha by making sure that when we make investment decisions, we understand all aspects of the company we are investing in.
If we think about making investment decisions, or any type of decision, the more we are informed the better we can assess our options. In this case, when we add environmental, social and governance data, we are positioned to create a better return.
ESG is not just about what happens today. It’s mostly about what will happen in the future. There are lot of issues people had been thinking were not material to investment returns. But we now know they are.
When we focus only on financial data, we are missing out not only on opportunities but also on risk. For example, if we don’t monitor what companies are doing in their supply chains, we might miss that a company we own has a supplier that employs child labor. The resulting scandal when this is discovered can affect our investment return.
Q. Which asset classes are you addressing?
A. We cover almost every asset class. We analyze issuers, and they can be corporate issuers of equity or debt, and fund complexes. We also analyze governmental issuers, and other issuers such as the African Development Bank.
Q. Who is your target market?
A. We built this platform to bring greater transparency to every investor. Right now, we are targeting B2B — financial professionals who work at family offices, RIAs, big wealth managers, and asset management companies that have the need of building sustainable portfolios and providing proof to their clients. As we progress, we would like to be able to deliver Physis directly to retail investors.
Q. You’re in a competitive space. Generally speaking, what advantages does Physis offer to clients over the competition?
A. Our idea since day one was to build the most comprehensive data hub available and to do so with an intuitive interface. In our library, a user can enter a security identifier and receive a detailed sustainability report.
While most of our competitors only focus on one aspect of sustainability, which is an ESG score, we have understood that it’s a great place to start but not where a good investor should end. That’s why, on the Physis platform, we go deep into every ESG score with sub-level scores and then we move ahead from ESG to provide impact data. How much water do they use in manufacturing, how much waste do they recycle? How many women are in board or executive positions in the company?
Then we add research into sustainable products and services, plus everything that relates to watchlists and controversy analysis.
Q. How do you price your platform?
A. Our model is simple. We have a yearly subscription fee mostly based on AUM and how many users the client would like to have on the platform.
Q. How do you integrate Physis into the workflow of asset managers and wealth managers?
A. Investors can have browser-based access or, alternatively, we can easily integrate with their systems through APIs or widgets.
Most of the time, investors have existing portfolios and want to understand the real impact of that portfolio to reallocate assets or make different decisions. In this case, they can just upload the existing portfolio’s securities to the Physis platform and have a detailed sustainability report comparing their portfolio to the benchmark of their choice. This is something that can happen ex post, when the portfolio already exists, but our platform can also be used ex ante in the making of the portfolio.
For that, you have access to all our data and a security screening capability. You can start with an investment universe of your choice (it can be very broad or very specific) and narrow your investment choice based on financial and sustainable criteria.
For example, if you want to build a portfolio based on the S&P 500 that is mostly focused on women and diversity, you can do that with Physis. We’re going to give you the issuers that meet your criteria.
We also have a robo-advisor (in beta) that allows you to input the preferences you have on risk and the goals you have for your portfolio or for your client’s portfolio as well as the sustainable development goals you or your clients most care about, and we can give you the optimum portfolio for you or that client.
Q. Which external sources of data are you using?
A. The Physis platform offers access to both financial and sustainability data in one place. We use more than 15 data sources. Some are publicly available, and others are not. We have relationships with Refinitive, MSCI ESG, and Morningstar, for example. Those are probably the most well-known. We also work with IEX Cloud, which is an amazing platform for financial data.
In addition, we work with some free data sources, including the Business & Human Rights Resource Centre, the World Benchmarking Alliance, and the World Economic Forum.
Q. Where are the biggest gaps in ESG data?
A. There are so many gaps right now, but if I look at where we were just five years ago, we have made huge improvements.
We have gaps that depend on whether a company is a large cap or a small cap. Large cap companies have developed in the last few years big CSR departments, with people focused on sustainable disclosure and sustainable reporting, which allows them to give various stakeholders good information. Small caps are still struggling a bit. It does not mean they are not sustainable; it means they have not yet put as much effort into sustainable disclosure. While sustainability might be fully integrated into what they do, they might not have the resources as a small company to build an extensive sustainability report.
The second problem we see is also about the reporting system. The GRI framework is probably the most comprehensive. When companies report with the GRI framework, they are giving more information, so we have access to more data and a better view of the company. When companies report using other frameworks, it is a little less the quality of the information they provide.
The third thing is region. European companies — even small and mid caps — are more used to sustainability disclosure so they are reporting with a quality that we have not yet seen from companies in other regions.
Finally, we are concerned with the way in which sustainable indicators are reported. Even if both use the GRI, they may not use the same methodology. This is probably the biggest problem right now. It’s not just about reporting; it’s about making sure the data is created using the same methodology from company to company.
Q. Are you ingesting unstructured data, and if you are, how are you dealing with it?
A. We are. As of right now, the world of sustainable data is still messy, so the work that our analysts are doing is key to making sure the quality of the data we make available on the Physis platform is high.
We have built a system that is a hybrid between algorithms that catch errors in data from different data sources and our team that reviews them, going back through the company reports. It’s probably one of the best added values of the platform — it’s not just about providing data; it’s about providing quality data.
Q. Can you tell me more about your proprietary research and how you use it?
A. I mentioned one aspect of our in-house research which is sustainable product data. We also offer proprietary research into investment fund sustainability. Fund analysis is very important because so many people invest through funds.
In assessing funds, most only do a weighted average of the ESG scores of the companies in a portfolio. But at Physis, we felt that was not enough. We have developed proprietary methodology and analyzed more than 60 big asset managers globally to understand how well committed they are to sustainability and how deep their sustainable investment policies are.
We have a redistribution agreement that provides us with the ability to look through to every single individual security held by more than 20,000 funds and more than 850 ETFs.
We don’t just judge the sustainability of every issuer, though that’s a good thing to do. It’s all about the real objective this fund is trying to achieve. It’s not just the financial objective, but also the sustainability objective of that fund. We use our in-house research to understand how well positioned the portfolio is to achieve that objective. We look at the portfolio manager’s support system. We want to understand how integral their sustainable investment team is to their investment decision making. Do they do their own research into sustainability or just take ESG scores from one of the sustainable rating agencies?
We also review their proxy voting and engagement activities. Change does not happen overnight. Moving the current economy to a more sustainable place is going to take money and time. Engagement — that is, talking to the companies in your portfolio — is a key aspect.
Proxy voting is hard engagement. Soft engagement can be as effective, especially if it comes through a collective system, as when asset owners come together to talk to companies they invest in. We value that very highly in our own methodology.
Q. Greenwashing is a serious issue for sustainable investors, so you have to go further than simply taking corporate disclosures at face value. How does Physis distinguish sincerity from misrepresentation, and facts from deceptive marketing?
A. I am very happy about the current focus on greenwashing. When I started in sustainable investing, I felt lonely — like I was one of the few pushing toward sustainability. Now, suddenly everyone thinks that sustainability has always been in their DNA.
I see the prevalence of greenwashing right now as a good stage in the sense that before nobody was caring about sustainability and now everybody is caring about it. The next stage is going to be about figuring out who is going about sustainability in a serious way.
Sometimes a company will report on something that is just a commitment. If it is just a commitment, we value that less than something that is a real effect. If it is not just a commitment, we need to see that there is a strategy in place so that they can achieve, for example, a certain level of emission reduction by 2030. We must see that they have allocated a budget to achieve that goal, as well. We go as deep as we can.
Something we always do is compare data within peer groups. If a company tells us that they are energy efficient in the way they produce shoes, we will compare their data with peer companies to see if it’s true. Comparison to companies of the same size in the same sub-industry offering the same type of product is key.
Regarding data sources, not everything that we are looking for comes directly from company reporting. That is why we use all the different data sources we have available. And sometimes we will reach out directly to a company to ask for more information.
Q. What can you tell me about your proprietary scores?
A. It’s about more than just the scores. We want clients to understand the impact they are having. From my own experience, I know that if we only provide a synthetic score — this company has a score of 90, this company has a score of 80 — it won’t be as effective as telling them why we are giving that score and what is behind the data. We want investors to understand the story behind the score.
This is where we really innovate. 99% of the narrative has been on financial metrics, but there is so much more to know about what your investment is doing. We are moving the narrative from financial metrics to the real story. And we can do that using high-quality data.
Q. Do you adjust for disclosure requirements that may systematically reward or punish companies based on, for example, market cap or region? You wouldn’t want to penalize a company for being more transparent than its peers.
A. We overweigh some indicators for small companies, and the framework that we use for larger companies is simplified when we look at smaller companies. These are the first things we do.
Sometimes a company looks great according to one indicator because of a regulatory requirement in its region, so we make sure we keep up to date with changing regulatory requirements regarding sustainability. We don’t want to credit a company for good performance when it was just complying with a regulation. That’s the second thing we do.
Third, it’s important when assessing sustainability at a company level to compare it to the appropriate peer group. You cannot compare apples with oranges. You want to compare apples of the same variety.
Q. They still represent a moving target, but what impact have SFDR and the EU’s taxonomy regulation had on development of your product? And are these regulations driving inbound interest?
A. The new regulation has been a great opportunity. We are a U.S.-based company, and we are targeting U.S. clients. But what has been happening is that investors in Europe have been calling and saying, “Guys, we love what you are doing. Can you help us comply with this new regulation?”
It has created a movement among companies in Europe that are trying to understand what they must comply with, because the regulation is not fully baked, and then how to comply. It’s expanding the idea of performance to include sustainability. Companies have one year to comply with the new regulation.
In terms of product development, the regulation is requiring companies to say if their products are Article 6, Article 8, or Article 9. Each offers a different way of assessing sustainability. A lot of companies are aiming for Article 9, which is the highest level of sustainability. But they need to provide the sustainability reporting, which is what we do really well at Physis.
It makes sense. In a world where everyone wants to say that they are sustainable, a regulation has come in to require that they prove it. The only way to prove it is with data — tangible evidence that you are having a positive impact.
Again, it’s a huge opportunity for us and we are now getting our first clients in Europe. And we are bringing our experience from Europe, which is more advanced when it comes to sustainability, back into the United States.
Q. Are U.S. investors (and companies, for that matter) ready for likely SEC regulations?
A. The SEC is moving pretty fast on sustainability. There is no doubt they are going to follow the SFDR approach being used in Europe. They have already started examining sustainable products because we have seen U.S. assets that purport to be invested sustainably increase by 260% over the last five years, reaching $17 trillion.
The SEC wants more clarity in sustainability disclosure. It also wants to avoid having people think they are investing sustainably but end up in a portfolio that looks just like the S&P 500. We welcome this type of regulation.
Some financial professionals in the U.S. are prepared and have already been offering high-quality sustainable products. Others understand that this is coming but are waiting to see what comes next. Instead of being pioneers, they think they’re going to be fast followers. It’s an approach I do not recommend.
Q. There is a lot of complexity in impact investing, and a lot of additional costs. Can the asset management industry deliver passive ESG products at prices index investors are used to?
A. Yes. We see a growing number of ETFs that include ESG. Passive is a good way to start implementing sustainability with reasonable management fees.
In the next few years we’ll see a wave of more sophisticated passive indices. Since an ETF must have a very low tracking error (compared to its index), ESG has been a factor — but not the main factor — in portfolio construction. Next, we’re going to see multi-factor sustainable portfolio construction. But even passive managers will need to engage with portfolio companies on sustainable objectives and strategies.
Q. Is there evidence that the trend toward evaluating investment options according to ESG criteria is changing corporate behavior in the real world? Are we, for example, reducing carbon emissions by investing responsibly? Or are we simply aligning our investments with our values but not improving real-world performance? I guess I’m asking if ESG investing can lead directly to systemic change.
A. I have no doubt that we are creating positive change. But change, again, doesn’t happen overnight and companies need both money and time to improve sustainability. Making sure company management feels pressure regarding sustainability is what the financial industry is doing right now.
The moment you create transparency by forcing a company to report on sustainability, the company starts comparing itself to its peers. People want to buy from sustainable companies. Companies are moving toward sustainability because they feel the pressure from buyers, from regulation, and from investors.
Q. I’d also say that people want to feel good about where they work. You wouldn’t want to have to exclude your own employer’s stock from your 401(k) plan because it doesn’t meet your ESG requirements.
Tell me about your relationship with Raiffeisen Capital Management in Italy.
A. We haven’t focused yet on growing in Europe, but Raiffeisen had heard of Physis and called us to learn more about what we do. They are leaders in Europe when it comes to sustainable investing. They were pioneers long before regulation required it.
We gave them access to our platform and they soon became our first client in Europe. They use the platform to prove how their funds are making a difference by going behind the ESG score. We’ve enhanced their ability to tell a story regarding their sustainable development goals.
Q. Access to data is frequently a stumbling block for fintech startups. Where did you turn to access that data before clients came on board?
A. When we reached the point where we couldn’t develop any further without access to data (which we couldn’t afford at that time), we applied to FinTech Sandbox. FinTech Sandbox gave us free access to the data sources we were seeking. It was a huge blessing because it allowed us to finalize our platform.
But it wasn’t just about getting access to data; it was also getting access to a community of other startups that were facing the same problems or had already solved the problem of how to integrate the data. That was also important.
It was an amazing opportunity for us to keep growing without having to fundraise.
Q. You are headquartered in Boston. What is the Boston fintech scene like in your experience? What are its strengths and weaknesses?
A. I am Italian. When I decided to build this company, after doing some research into the ecosystem, I decided to do it in Boston. I had the benefit of being part of the Harvard community, but I knew there was so much more available in Boston, like FinTech Sandbox.
The main surprise was that I did not expect to feel so welcome. I came from another country to build Physis here and I felt totally supported by the whole ecosystem. In a way, it’s a small community but I believe this is a strength in the sense that it’s easy to connect to people. Everyone is friendly and supportive. In other places, people may do something for you because they want something from you in return. I have never felt this in Boston.
In terms of weaknesses, I can think of only one thing. While the ecosystem is very advanced and extremely supportive, investors are still very old style. I think things can happen in Silicon Valley at a faster rate because the investors there will take higher risks.
Q. Are you hiring?
A. Yes! We are growing and always looking for good people who are hungry for their next big challenge and want to join a fast-paced startup.
We are now looking to fill two positions. The first is for our head of sales and the second is for someone who can help us with our marketing, especially our social media and our content marketing.
People who are interested can email me at stefania.dibartolomeo @ physisinvestment.com with the reasons why they want to work at Physis and why their skills and experience are what we need. And a resume, of course.
Q. What else do you want us to know about Physis Investment?
A. We are not just what we do; we are also how we do it. To me, building a diverse, inclusive, and supportive environment is very important. This was one of my goals in starting Physis. It’s not just about building an amazing product, it’s also about building an environment where everyone can keep learning and growing every day.
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* Full disclosure: I am one of them.