Twenty years ago, investors mocked the launch of the first ESG focused index called FTSE4Good. But two decades later, interest in ESG indices is driving some of the biggest allocations of capital today. FTSE Russell Americas Head of Sustainable Investment Tony Campos discusses what has changed since then, what’s driving markets’ and companies’ need for certainty, and what the world of sustainable investing might look like in 2026.
Jamie: OK, so Tony, I want to, if you don't mind, go a little bit back to basics. You say you have been there 17 years – were there even any real like ESG style indices, even back then and like going over the last 17 years, how has that product changed and who are your clients and who uses the products that you have?
Tony: 20 years ago, FTSE launched FTSE4Good, one of the first-ever global ESG indexes. So that actually predates my time at the company. I believe I was the fourth person to join focused on ESG in 2004, but FTSE4Good at the time was quite important and different. Now, if we think over the last 20 years, I say often sustainable investment has changed a lot over that time, but one thing has really stayed consistent, which is a lack of definitions and standards. That's one of the biggest challenges we have.
Jamie: Can I ask about FTSE4Good – so back then, how would FTSE have gone about constructing that index?
Tony: The real concept here is you start with your standard market cap weighted universe because you want broad exposure. Our clients are looking for broad, diversified global equity…
Jamie: Big liquid names as well.
Tony: Exactly. Now, from an ESG perspective, you have to define how you're going to set transparent rules for how you will define who gets in and who gets out. For FTSE4Good, we look at that through two dimensions of corporate ESG practices and behaviour. One is thinking about company conduct. So what's the risk management and impact of the company's day to day operations from an environmental and social perspective?
But you can also think about the impact of the company's products and their use in society. Some can be negative, some can be positive. So it's possible to have a company that makes environmentally beneficial products like solar panels or wind turbines, but treats their employees poorly, or maybe manufacturers those products in an environmentally harmful way. Equally, you could have a company who maybe their products are something like tobacco, but they do so in a fairly environmentally thoughtful way.
Jamie: OK, so you don't just look at environmental impact. It's a lot about corporate culture as well. So how about corporate culture and the way people treat employees and diversity? How do you measure that?
Tony: So that's a big challenge. It's one that I think the industry is pretty aware of. But ultimately, the disclosure from companies is not yet sufficient enough to allow us to make fully informed decisions about diversity and inclusion. Part of the reason for that is the publicly available data that's provided is sparse and difficult to compare across time, across regions, across sectors.
Jamie: As the years go by and ESG becomes a bigger and bigger topic, are there becoming ways of measuring ESG more easily with companies? And does that then help you create products, create indices which are more aligned with what you're trying to achieve?
Tony: Yeah, absolutely. So there's been a great development in the quality of data that's been disclosed and therefore the tools and models that can utilize that data. Now that quality of disclosure still isn't as good as it needs to be, but it's much better than where we were certainly 20 years ago and FTSE4Good launched.
Jamie: Okay, so we'll come onto the future in a second, but let's go back to FTSE4Good. So that was really the pioneering product, which I imagine at the time didn't get a huge amount of attention because people simply want to make money, and…
Tony: It did get a lot of attention.
Jamie: Oh, sorry.
Tony: When it was launched, it was panned in the UK press and so there was an interesting amount of pushback from UK listed companies at the time. However, I think since then the nature of that engagement from companies with the ESG agenda, particularly as it comes to ratings and indexes, has changed pretty dramatically.
Jamie: So talk about in the last 15 years and how products have increased and exactly how they are designed and built and what your involvement is there.
Tony: Yeah. So the main client base for us is going to be large asset owners and investment managers. Now, the use of indexes for those investors is often as the basis for passive equity allocation in our case. So they're using market cap weighted indexes to get their exposure to particular markets. And from an ESG perspective, you can introduce criteria and rules to help inform how that index gets created. A lot of the work we're doing today is specifically focused on ensuring we match the underlying index universe and risk return profile. So there's no discrepancy in performance or risk, but you are getting that ESG impact.
Jamie: Five to 10 years ago, how many of your clients would have a specific ESG mandate and how many do now? And what's the dynamic of that change? What's the demand for that product like?
Tony: There's two different answers, really. One is on the institutional side, the other is more for retail and individual investors. On the institutional side, those sort of thematic investments or allocation specific to ESG strategies are not as common. What we're seeing there is large asset owners, like some of the biggest pension plans in the world looking to not put specific money into ESG portfolios, but rather integrate ESG into their standard investment allocation and strategies. That means for us re-engineering their standard traditional benchmarks to be more ESG integrated.
OK for individual investors and say, for example, financial advisors, wealth managers and say an investment product like an ETF, you are often more focused on thematic ESG concepts and impact. So you're probably being a little bit more strict on some of the ESG criteria to be able to demonstrate how the index is different and what impact you're getting.
Jamie: And Tony, who ultimately makes the decision between which companies are in and which companies are out. Is there a committee or are you in charge of that?
Tony: So one of the benefits of indexes is they're all rules based and transparent. Coming back to my original comment around lack of standardization and definitions here, the reality is there's a range of preferences for sustainable investment in ESG. So the rules for any index will determine who gets in and who gets out. But just like any index, those decisions have some subjectivity in them.
If we're dealing with an index product that's meant to be very exclusive, what we would classify as a kind of best-in-class type group, then those rules would be very restrictive if we're trying, on the other hand, to match benchmark like returns with some ESG improvement, maybe carbon reduction, those rules could be quite different. And in that case, we need to make sure that we're transparent. We need to make sure the rules are available so clients can understand what they're buying because there's no one way to do ESG.
Jamie: Have you seen real significant pickup in demand on both institutional and retail side over the past few years? And what's the dynamic of that been?
Tony: Yeah, it's been pretty remarkable. So if we look at just some recently published numbers on our assets, passively tracking our sustainable investment indexes, as of June last year, it was about $60 billion in AUM. As of June this year, about $160 billion. So pretty great growth. What's driving that is a few things.
On the retail side, what we're seeing is more fund flows into existing products. So ETFs that use some of our indexes…
Jamie: Okay, so that’s more of a technical thing.
Tony: …generating more and more asset flows. As part of the reason for that is more financial advisors are becoming aware and comfortable allocating into ESG solutions and it also helps some of those ETFs have now been around for three years, and have an established track record.
On the institutional side, what we're seeing is demand for climate specific solutions. A lot of the largest asset owners in the world think about climate change as the number one risk for their time horizon. And what they're looking to do is make sure that their indexes, which they often passively track for their global equity exposure, are aligned for a climate transition in the future.
We help them do that by re-engineering the benchmark, essentially reweighting companies, rather than deciding some companies come out, some companies come in. We want to keep that broad exposure. We just want to weight more to the leaders and underweight some of those that may be left behind in the climate transition. And for asset owners, that's a big part of the demand.
Jamie: Now, you said it went from $60 billion to $160 billion, which is obviously great. But I think in the grand scheme of things, these are still relatively small numbers. So I mean, can you make any kind of prediction about what you think that number goes to? And, you know, without getting too political, what needs to happen for people to really wake up and dedicate a significant amount of that portfolio to ESG? Is it a price on carbon? Is it tax changes? What's your current view?
Tony: So for the first question, I think it's really important to think, yes, this is still a very small part of the market. From that perspective of assets tracking, we've seen an explosion in new investment solutions and products and explosion in AUM into those into those products. But it's still starting from a very small base. But I think it's important to remember that ESG is not just about sort of product and investment products for a lot of our clients, it's about process.
So particularly for active managers that maybe aren't managing an ESG fund or marketing an ESG fund, it's about their investment decision making process. So a big part of this is about data and information benchmarking so they can improve the way they make investment decisions to incorporate environmental, social and governance issues. That doesn't mean that the strategy is an ESG strategy. It might still be a US large cap strategy or a value strategy or an emerging market strategy, but now they're just being overtly conscious about understanding where those ESG risks lie, making sure it fits into their investment decision making.
Jamie: Does this start to become a bit of a virtuous circle with the tail wagging the dog a bit? It's like these corporates who are seeing the way investors are changing their mind in terms of dedicating more money to ESG, is that forcing these boards of directors and senior people at companies to readjust their priorities?
Tony: Yeah, it's really forcing those companies first and foremost to be transparent about what their approach to managing ESG risks are. So right now, there's still a huge need for more and better data on the way companies manage ESG risk. In pretty much every market globally, with very few exceptions, this is voluntarily reported data. There's no regulatory obligation for some of these things, which means there's a lot of qualitative data and assessment available, and it's very hard to compare.
Now that is changing in some dimensions, and there's a lot of market led initiatives that are helping develop frameworks for corporate reporting, particularly around things like climate related risks. So that's helping companies bring more information to the market. But that's being market led. So some of the biggest asset owners, asset managers are putting pressure on the issuers to bring more information to the market.
Jamie: Do you feel more hopeful about the future of forums like COP26? Do you feel that enough is being done?
Tony: So I think optimism? Yes. Caution? Yeah, absolutely. It's still a very scary situation we're in. There is great momentum and one of the benefits, or I think main outcomes, of COP26 will be a recognition that finance is at the center of climate change. And now there's going to be an increased focus on improving the data to the market, establishing that market infrastructure for climate risk in particular, so that investors can make more informed decisions. Now, the key ingredient that is missing is still a price on carbon.
Jamie: Let's talk about the price of carbon briefly, because when do you foresee that happening? Is it something that can happen in the short term, or is this something that gets kicked down the road?
Tony: It's really hard to say. I think one thing that we can take some, you know, positive momentum from is the fact that investors are starting to act even without that price on carbon.
Jamie: Because am I right in thinking that even some of the large oil companies are asking for this as well? So you do feel that even large corporates are on board?
Tony: Well, you know, markets and companies want certainty, and that will help everyone make some of these longer term decisions. Right now, it's a question of are we going to be slamming on the brakes or how gently can we slam on the brakes? Perhaps is a better way to think about it. Now many of the particularly asset owners that we're working with are trying to think about the low carbon transition and ready their portfolios. What they're trying to do is, you know, take decisions now, so not waiting, but also giving themselves some flexibility.
So from the perspective of an index and data provider, that means, you know, transparent frameworks that can be effectively ratcheted up or dialed down over time. So the way that we might create a climate transition index right now could look very different in five years’ time. Once the data is better, maybe decarbonization is happening more rapidly and you need to be a little bit more aggressive. At the same time, maybe things go slower, or maybe there's a market event that you need to account for. So having kind of the flexibility and the way in which you apply some of these climate risk data models into index construction is really important for the future.
Jamie: So let's talk about the future then Tony. So kind of a crystal ball question, but if you were to look out five years to 2026, what do you think the world of sustainable investing looks like? The world of indices?
Tony: Yeah, I think we'll certainly see greater sort of global adoption of some of the regulatory and market led initiatives that are coming out of Europe in the EU. So there is a pretty well-established framework for classifying green impact coming out of the European Union. We'll start to see other markets start to adopt a similar taxonomies if not exactly that and more regulation, more disclosure improvement from corporates.
But for investors, I think what we'll see is a reallocation of existing capital into more ESG focused solutions, more sustainable focused solutions. For us, that means, you know, really an asset transition from sometimes market cap weighted benchmarks and allocations. So those largest asset owners, like your big government pension plans today are invested in the market cap weighted, you know, Russell US indices or FTSE global indices. We'll start to want to take some of that money and put it into the climate transition aligned versions of those benchmarks.
So it won't exactly be about new money being allocated in some of those scenarios, but rather a reallocation. And that's a signal to the market around how some of these solutions can be enacted, which will help raise visibility and also demonstrate for some of the smaller sized asset owners and other and other investors, you know, kind of rules for the road.
Jamie: And just because it's such a hot topic at the moment, the world of digital assets and AI; as those two influences come into the world of finance, how can you use them to further improve your products or how could they influence the world of investing?
Tony: Definitely, from a data point of view, it can be very helpful. So right now, a big limiting factor, and this really has been the case throughout the last 20 years that we've been working in sustainable investment, you know, the disclosure from companies can be a limiting factor. Often times, you have to model out data to fill in some gaps, and sometimes you need to look at non-corporate reported sources of information, media sources, sometimes even including social media sources and that sort of big data effort, unstructured data effort requires certain technologies to not only bring…
Jamie: …a machine to read it for you.
Tony: Absolutely, and not only to bring it in, but increasingly to introduce some type of sentiment analysis into what you're reading. Yeah, and that's really crucial. It's also very difficult from our perspective in terms of rules and transparency and objectivity, because it's really hard to put some structure around that. So there's a balance we have to reach between the use of those data collection techniques and assessment techniques versus kind of the transparency we have to put into the index product.
Jamie: Well, Tony, it's been so great chatting with you. I just want to say thank you so much for your time.
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