Global institutional investors are increasingly looking for a sustainable seasoning in smart beta portfolios, according to a new study by index provider FTSE Russell.
The FTSE Russell annual survey of about 140 asset owners across the world found about 60 per cent of respondents who already used, or were considering, smart beta strategies planned to add an environmental, social and governance (ESG) overlay.
“Climate/carbon tops the list of sustainability themes that appear to be a focus at 64%, with environmental considerations close behind at 59%,” the study says. “Governance and social themes are also widely considered, with over half of respondents indicating such.”
But the survey shows a significant regional split in attitudes with more than 80 per cent of non North American respondents with smart beta investments looking for ESG options. By contrast, only 42 per cent of North American investors were interested in sustainable smart beta – although the figure was considerably higher than the 17 per cent recorded in the 2019 FTSE Russell survey.
While North America (US and Canada) respondents have traditionally lagged the rest of the world in ESG uptake in general, the 2020 study found the gap was beginning to narrow.
“The 2020 rate of sustainable investment adoption and evaluation in [Europe, Middle East, Africa) EMEA (85%) remains higher than that of North America (63%),” the FTSE Russell report says. “Notably, in North America the rate of implementation and evaluation increased from 39% in 2018 and 2019 to 63% in 2020.”
Large investors (US$10 billion or more) were also more likely to follow sustainable strategies with more than 80 per cent in this category either using or evaluating ESG approaches, compared to only 65 per cent of investors holding under US$10 billion.
Jaakko Kooroshy, FTSE Russell head of sustainable investment (SI) data and methodologies, says in the report that the 2020 survey findings “are a striking reminder that sustainable investment is becoming an ever more important consideration for asset owners” during “these turbulent times”.
Kooroshy says the study also found respondents were moving beyond simplistic exclusion strategies to a more nuanced take on ESG investing.
“Sustainable investment strategies continue to broaden, with a greater emphasis on more sophisticated approaches such as re-weighting based on SI and ESG factors (from 36% in 2019 to 55% in 2020) compared to more basic negative screening (64% in 2019 to 48% in 2020),” he says.
In local ESG news last week, the ‘ethical’ fund distribution platform, Mindful Money, added almost 400 non KiwiSaver NZ managed funds to its list. Mindful Money launched last year, providing analysis of the underlying holdings according to 10 “issues of concern” such as tobacco, fossil fuels and gambling.
The site enables investors to select funds that might match their personal values with a small commission paid to Mindful Money on sales made through the platform.
As the sustainable investing trend continues to build momentum, there has also been a rush of data suppliers and raters into the ESG space.
And last week financial data giant, Bloomberg, added to the ESG ratings mix with a new “proprietary” scoring system.
In a release, Bloomberg says its new service would begin with environmental and social (ES) scores of 252 oil and gas companies. Bloomberg will also rate over 4,300 firms on governance factors – initially looking at board composition.
Patricia Torres, global head of Bloomberg sustainable finance solutions, says in the statement: “ESG data is critical to the investment process. We see an opportunity to provide transparent and complete scoring methodologies along with the underlying data in order to support investment and finance professionals make informed decisions.
“By providing transparent ESG data and scores, we are helping investors decode raw data that is otherwise hard to compare across companies. For corporates, these scores offer a valuable, quantitative and normalized benchmark that will easily highlight their ESG performance.”
Research published by European firm Opimas earlier this year estimates the annual revenues of ESG data and research houses would soon exceed US$1 billion.