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The notion that ESG belongs solely in active management is outdated as indexes are becoming more important across the institutional investment landscape.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.
This post first appeared on December 4 on the FTSE Russell blog.
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