By Carolyn Eagle – senior product manager, sustainable investment
A significant level of assets have flowed into sustainable investment in recent years, to the tune of $30.7 trillion globally in the five major markets at the start of 2018—a 34% increase in two years—according to The Global Sustainable Investing Alliance’s most recent trends report. At a recent Principles for Responsible Investment (PRI) event in Mexico City, I addressed a crowd of Latin American asset owners and asset managers to share insights drawn from our work in this exciting and growing area.
FTSE Russell has been actively engaged in sustainable investment for nearly 20 years, since we launched our first flagship socially responsible index, FTSE4Good, in 2001. Since the inception of FTSE4Good, we’ve seen asset owners increasingly adopt ESG standards into their investment policies and asset managers request more granular information on the companies they’re evaluating. Interest in ESG has also moved beyond equities, expanding into asset classes such as fixed income. While this change has seemed incremental when viewed on a day-to-day, month-to-month or year-to-year basis, when viewed with a longer-term lens the level of change is quite remarkable.
Acknowledging that the growth in ESG will only continue to deepen, I shared three key trends driving its evolution with PRI attendees:
- Application of ESG to Passive Investing – The notion that ESG belongs solely in active management is outdated as indexes are becoming more important across the institutional investment landscape. Indexes covering ESG themes or tilted toward ESG factors can be applied as a benchmark, or as the basis for a passively invested portfolio.
- Increased Demand for Sustainability Information – Public companies are feeling pressure from shareholders, as well as consumers, employees, and other key stakeholders to manage sustainability issues. Through corporate engagements and other channels, investors are demanding additional and improved disclosure of ESG risks and, in some cases, opportunities.
- Improved Data Collection – Advancements in data collection techniques, tools and technology have changed the way we absorb and assess source information. While great progress has been made, there’s still plenty of room to drive towards more standardized, transparent ESG disclosures and measures to feed into index-based investment tools and strategies.
Collectively, each of these trends enhances the other. As disclosure quality improves, tools like ratings models and indexes that apply those models improve as well, leading to further growth of adoption and demand. In turn, this helps investors who are looking to integrate ESG across their portfolios using a growing range of solutions. It can be a virtuous cycle.
Incorporating ESG Into investments
After sharing these trends with the audience, I moved past the why and onto the how, as a question we receive often is: How do I incorporate ESG into my investments?
Proper ESG implementation in a passive context relies on benchmarks driven by consistent and transparent data sets. This holds especially true with ESG since there is no single way to define or implement an ESG investing approach. While many try to forge a consensus around common definitions in ESG, a wide range of views still exist. Therefore, when applying ESG data to an index, flexibility is critical.
Some use ESG to screen which companies to exclude from an index. Others may use indexes that apply ESG as a way to determine allocation by over or under weighting securities rather than just excluding them. Index providers are not looking to define the one way to evaluate a company or incorporate ESG into an investment. At FTSE Russell, our aim is to provide rules-based, transparent data models that can be incorporated into our indexes or directly into our client’s investment processes.
As sustainable investment continues to be a dynamic, evolving area of the market with ESG investment strategies progressing rapidly, our role is to provide asset owners and asset managers customizable index tools and data that help them fulfill their investment needs.
© 2019 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.