28.10.22 “This is as objective as it gets” Interview with Lucas von Reuss, CEO of Quant IP • Reading time: 5 min.

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Summary

According to Lucas von Reuss, particularly sustainable companies can be identified objectively on the basis of their patent portfolios. The CEO of Quant IP and his team have discovered some surprising green champions using this method.

Surely it is a good thing to direct investments to the right companies with the help of ESG ratings? What is your problem with the system?

It has a number of design faults. For example, the indices relate to how a company has performed in the past. But this does not enable the companies that have the greatest potential for making a real difference to get access to the capital they need. One of the best examples is steel manufacturing, which uses very large amounts of energy and produces high levels of greenhouse gas emissions. If we want to continue producing steel, we need to find a zero-emission method of doing it. thyssenkrupp could develop a method of this kind, but the company is being penalized because of its backward-looking ESG rating and finds it difficult or impossible to obtain capital. And this is precisely the capital that is needed for the transition to green steel. The companies that most deserve the money are most heavily penalized by the current ESG rating system.

What is the alternative to today’s ESG ratings?

It’s quite simple. We need to look to the future not to the past, for example by analyzing thyssenkrupp’s current patent portfolio. This shows that a growing number of the company’s patents relate to the subject of green steel. Therefore, it is highly likely that thyssenkrupp will achieve the transition and this should be supported with capital. As things stand, the company is being penalized for belonging to an industry that produces large quantities of emissions. In addition, there is no consensus about the current ESG ratings – the same company can be given totally different ratings by different agencies.

You want to evaluate companies on the basis of their patent portfolios. Is it possible to do that objectively?

We are not working with information that we have made up out of thin air. Instead, we rely on the assessments of the highest authority in the world of patents – the World Intellectual Property Organization (WIPO). It is the umbrella organization for patent offices all over the world and has the responsibility for standardizing the classification of patents. On the lowest level, there are 300,000 technical classes, which means that the subdivisions are very detailed. WIPO uses this classification system, which has been built up over decades, to characterize certain patent classes as being green if they contribute to achieving the Sustainable Development Goals of the United Nations. For example, there are classes for solar heating and photovoltaics. Patent examiners at the major patent offices are responsible for classifying the patents. This is as objective as it gets.

Lucas von Reuss, CEO of Quant IP

You’ve already mentioned the example of thyssenkrupp. Which other companies come out of your analysis particularly well?

Many companies that are currently the problem have the best chance of being the solution in the future. This is why German carmakers and a Saudi Arabian oil company have had very good results. The reason is quite simple. If German car manufacturers do not develop a solution for zero-emission mobility, in 10 or 15 years’ time they simply won’t have a business. And if the oil company Saudi Aramco fails to find alternatives to selling oil, its business model will disappear in around 30 or 40 years. This is why it is in the areas that are causing the most problems today that the greatest efforts are being made to address these problems with the help of innovations.

You have developed an alternative sustainability index. How does it work?

We measure how many green innovations every listed company produces, including in comparison to its competitors. This allows us to create a ranking that indicates the contribution each business will make in the future to resolving our problems. On this basis, we can develop a rule-based system for selecting shares.

ESG stands not only for the environment, but also for social responsibility, and good governance and, of course, you can’t measure these things using patents. Do you believe that the other two aspects cannot be measured?

I do believe that they can be measured, even if it is much more difficult to get an objective view of them than it is with patent applications. Our discussions with potential partners about an investment product show that people who are interested in our concept also want to take the other two aspects of sustainability into consideration. The good thing about our approach is that it can be applied to any type of shares, without the SG criteria or with weak or strict SG criteria, because within the initial selection we can identify the green innovation leaders.

How much interest is there in the financial sector for your alternative concept?

There is a lot of interest, because the design weaknesses of the existing methods are now starting to become clear. It is very difficult for the financial sector to be able to offer sensible products when only ten to twelve percent of companies in the developed world produce comprehensive ESG reports. Only a very small proportion of businesses are ready or able to provide the information that ESG rating agencies need. It is incredibly time-consuming and costly. But, at the same time, the regulators require ratings of this kind to be available. Many investors are already realizing that the existing principle does not work and that therefore we will not achieve the Sustainable Development Goals. Our approach is much simpler. All the data are already available in a public database and businesses do not have go through the time-consuming process of collecting them.

Does your approach also promise higher returns for investors?

It wasn’t developed for that purpose. However, we can use past data to compare portfolios with a broad-based index investment. And these comparisons show that our portfolios tend to achieve higher returns. From an intuitive perspective, it is clear that the companies we give higher weightings to are likely to be more successful in the long term than their competitors because they are investing in the future.

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