For the last six years we’ve conducted and published the FTSE Russell Smart Beta survey of asset owners. With each passing year we learn more details about asset owners’ awareness, attitudes and behavior related to smart beta, and we continue to adapt the questionnaire to accommodate emerging trends and areas of investment interest to our clients and the global asset owner community.
We first included ESG in the survey back in 2017, asking if asset owners were thinking of applying ESG considerations to smart beta to develop a better understanding of the emerging demand for ESG that appeared to be bubbling up into smart beta. We and our readers were surprised to find out the degree to which ESG was being considered an option to accompany smart beta indexation—in 2017 over 40% of asset owners using or evaluating smart beta said they were looking to apply ESG considerations to a smart beta strategy.
This is reflected in our client work where we work with a growing number of asset owners who wish to integrate ESG parameters—especially climate risk—into smart beta indexes. We call this Smart Sustainability and apply a consistent factor methodology across both risk premia factors and ESG parameters. Therefore, we decided to dig deeper into this approach this year by producing a separate report to sharpen the focus and help us better understand the motivations and regional differences in the application of ESG to smart beta. The results are striking, with pronounced regional differences within Europe and North America, which appear to be growing.
- For example, 77% of European asset owners expressed interest in applying ESG considerations to smart beta which was up from 55% last year. In contrast only 17% of North American asset owners indicated similar interest, which was down from 25% last year.
- This may reflect the changing regulatory context with European regulators encouraging ESG integration, while in the US, recent interventions under the current administration, including for pension plans subject to the Employee Retirement Income Security Act (ERISA), have arguably been in the opposite direction.
- When those who indicated interest were probed further for their motivations, “long-term risk mitigation” was the most popular response, up from 54% of respondents last year to 78% this year.
- The most common application of ESG data was negative screening (over 60%). However, 46% of larger asset owners (over $10B AUM) are likely to go beyond screening and use ESG data akin to factors within the re-weighting methodology, versus only 26% of smaller asset owners.
- Appetite for ESG & smart beta is also higher among larger funds; with 58% of larger funds (but only 30% of smaller funds) looking to increase their allocation over the coming years. Only 4% of larger funds did not think they would increase allocations to ESG & smart beta.