What is Arabesque: sustainability fund manager, ESG research house, or new hybrid?

RI takes a closer look at the company that secured $20m in external finance for its research arm earlier this summer.

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Few investment start-ups have bagged the high-level support shown to Arabesque. In a speech earlier this year to the European Commission, no less than Mark Carney, Governor of the Bank of England, referenced the company alongside larger financial players such as BNY Mellon, UBS and Blackrock, saying: “Companies are developing ways to better score ESG performance and invest accordingly. For example, Arabesque uses machine learning models to assess the performance and sustainability of companies, and stock selection strategies to tailor portfolios to a wide range of investor ESG preferences.”
Arabesque’s board also includes sustainability luminaries such as Georg Kell, founding Executive Director of the UN Global Compact, John Ruggie, Professor of Human Rights and International Affairs at the Harvard Kennedy School of Government, Carolyn Woo, former CEO of Catholic Relief Services, Barbara Krumsiek, former President and CEO of Calvert Investments and Yolanda Kakabadse, former President of WWF International.
But as RI reports today, relationships between Arabesque and the big ESG research companies that previously sold it data for asset management, soured after Arabesque launched its rival ESG data platform, S-Ray.
MSCI, Sustainalytics and RepRisk all ended contracts with Arabesque – the latest being RepRisk in January this year – over concerns about it running S-Ray as a competing business alongside the investment funds or data comparison for which they sold it information. Arabesque denies the allegations.
Arabesque has also lost a number of senior staff in the last couple of years, during a period in which the company was losing money; albeit not unusual for an investment start-up. Arabesque’s filed accounts in the UK show losses in 2018 of £1.3m, lower than losses of £2.3m in 2017 and £1.6m in 2016. Turnover in 2018, however, was significantly higher than in 2017 (£1.3m v£433k). In the 2018 accounts, Arabesque says a forecast increase in assets under management should bring the company into profit in 2019, although it warns in the accounts about potential liquidity issues. The senior departures included Tarik Selim, its former CFO, and brother of Omar Selim, the firm’s co-founder and CEO. Tarik Selim resigned from the company in March 2018 according to its accounts, just over a year after joining as a Director in December 2016. He was replaced by Alfred Lang, a former Barclays investment banker. It also lost the Chief Investment Officer for its funds business, Anja Mikus, a former CIO for Union Investment. In May 2017, Arabesque said she had been seconded for six months to become the interim CEO and CIO of the German government’s €23.6bn nuclear phase-out fund. But Mikus did not return. Arabesque’s effective CIO is now Dr. Hans-Robert Arndt, its Head of Quantitative Research, another former Barclays investment banker.
So what is Arabesque? Is it a fund manager, an ESG data sales business, or a new hybrid? Arabesque’s latest publicly filed accounts in the UK say the combined staff of Arabesque Asset Management and its affiliates, including Arabesque S-Ray, was 23 people in 2018, including its two founder directors, Omar Selim and Dominic Selwood. Selwood is a well-known English historian, journalist, author and barrister. His Wikipedia page says he has written several works of history, historical fiction and historical thrillers, most notably The Sword of Moses. Both Selim and Selwood were former investment bankers at Barclays. Selim was previously head of global markets for institutional clients in Europe, the Middle East, Africa and Eastern Europe. Selwood was Global Head of Islamic Products. The company is expanding quickly. Arabesque’s website currently shows a total staff of 46 people. The website describes Arabesque as an asset manager, with S-Ray described on the same site as a tool to monitor corporate sustainability for more than 7,000 of the world’s largest companies. Selim told RI in August that S-Ray has offices in Frankfurt, London and Singapore, employs 35 staff, and would soon be recruiting more, taking it up to 70 staff. He told RI that there were up to 7 people
working full time for Arabesque Asset Management.
Arabesque started as a pure fund management business back in June 2013. Selim told RI that the ESG quant firm had been developed within Barclays Bank from 2010 to 2013 in cooperation with professors from Stanford, HBS, Cambridge, Oxford, Maastricht and the German Fraunhofer Society. Following a management buy-out in 2013, it was set up as an independent firm regulated by the FCA (UK), SEC (US) and BaFIN (Germany).
London-based, The Arabesque Partnership LLP, is the ultimate controlling party of Arabesque Asset Management Holding Ltd, which is a 100% shareholder of Arabesque Asset Management and Arabesque S-Ray. Selim told RI that five private individuals make up the Arabesque LLP shareholders, including – in his private capacity – Roland Berger, the German entrepreneur who founded the global consultancy of the same name.
The new $20m (€17.8m) financing that Arabesque secured in July was for a stake in Arabesque S-Ray only, which is now an independent, Frankfurt-based company, although still ultimately owned by Arabesque. That capital injection, understood to be for a combined 20% stake in the business, values S-Ray at circa $100m after just two and a half years in business. The investment will go some way in adding to S-Ray’s capability as an ESG research house.
Arabesque S-Ray in Frankfurt is lead by Andreas Feiner, CEO. Another Barclays alumni, he was formerly head of distribution for Barclays Saudi Arabia.
Prior to launching S-Ray, Arabesque had been running two Luxembourg-registered quant funds, started inearly 2014. The ‘Systematic’ funds are understood to run some $350m in assets, of which $280m is invested in the Arabesque Q3 17 SICAV, a Sharia-compliant fund, where the majority of the assets is retail client money from BIMB, a savings bank in Malaysia. Last week, Arabesque announced the launch of a new sustainable global equity fund. The back-office administration for the funds is outsourced to IP Concept, part of Deka Bank.
Selim said Arabesque was a “challenger/disrupter” and that was why the ESG research competition was upset with S-Ray. He expanded on the “challenger/disrupter” theme by pointing to its employee remuneration structure. He said Arabesque was ‘employee owned’ and that all staff had initially been on a fixed £2.5k per month, which recently went up to £4k per month. In addition to the flat salary, staff receive shares in the company, which are understood to vest over a lengthy ten-year period. According to its accounts, Arabesque has steadily been issuing tranches of new shares.
During 2018, Arabesque sold the intellectual property for S-Ray to its German affiliate, which is still under common ownership. The new investment into S-Ray came from the German State of Hessen, Allianz X, an investment arm of the insurer Allianz, Commerz Real, a subsidiary of banking group Commerzbank, and DWS, the former Deutsche Asset Management, which revealed its stake to be 2.68%. The investment by the public body of the State of Hessen, home of Germany’s financial capital Frankfurt, surprised the market. Hessen has made a push on sustainability in recent years and in May became the first state in Germany to sign up to the
Principles for Responsible Investment (PRI). It is also the lead on Germany’s Green and Sustainable Finance Cluster, which is currently working on how to implement the recommendations of the Taskforce on Climate Related Financial Disclosure (TCFD) in German financial institutions. A mover in that sustainable finance push has been Tarek Mohammed Al-Wazir, a politician in the German Green Party who since January 2014 has been deputy to the Hessian prime minister Volker Bouffier, and Hessian Minister of Economics, Energy, Transport and Regional Development. Al-Wazir is a member of the Landtag of Hesse and was co-chair of the Hessian Green Party. Arabesque says its new “strategic partnerships” aim to “accelerate” the growth of S-Ray as a global ESG data provider. Alongside ESG research sales, Andreas Feiner said S-Ray also produces what it calls ‘diagnostics’ for the ESG scores that companies are given, which he says can enable the companies to understand their scores better. He says S-Ray does not sell corporate advisory work itself. Instead, he said, it partners with audit companies like Accenture who can advise companies on improving their ESG performance.At the time of the S-Ray deal, DWS, the German fund manager, said it planned to further collaborate with Arabesque, including entering into exclusive talks with the firm about a potential minority stake in a new AI division that Arabesque was developing. That AI operation, Arabesque AI, was registered as a UK company at the end of August. Dominic Selwood is the Company Secretary to Arabesque AI and the Directors are Dr Yasin Rosowsky, Head of AI at Arabesque who is responsible for database development and applications of machine learning algorithms for financial forecasting, and Dr Qasim Nasar-Ullah, listed as Quantitative Research on the Arabesque website. Arabesque AI was launched with 750,000 one penny shares, owned by Arabesque Asset Management Holding Ltd.
Arabesque is also looking to raise further capital for S-Ray. Selim told RI that the first round of investment into Arabesque S-Ray would be followed by a second round of financing, which he said would close very soon.
He also told RI that DWS would itself soon launch an alternative data business based on S-Ray.