Regions Diverge On Smart Beta ESG

Shanny Basar

More than three quarters of European asset owners want to apply environmental, social, and governance considerations to smart beta but, in contrast, less than one fifth of North American asset owners indicated similar interest.

FTSE Russell, the index and data provider owned by the London Stock Exchange Group, released its sixth annual global institutional asset owner smart beta survey this week. Smart beta products do not track a standard market index which is weighted by market cap, but allow investors to track factors such as dividends or low volatility.

For the first time, FTSE Russell has produced a separate report on ESG integration in smart beta strategies, which the group calls smart sustainability.

David Harris, group head of sustainable business at FTSE Russell, said in the report that smart sustainability is the combination of sustainability parameters and smart beta risk premia—for example, via factor exposure—within a single index solution. It reflects the growing demand for the incorporation of factors as well as ESG data into investment tools including indexes.

The new survey found that 77% of European asset owners expressed interest in applying ESG considerations to smart beta, up from 55% last year. In contrast, in North America only 17% of asset owners indicated similar interest, and this was down from 25% last year. The 2019 survey was conducted in January and February, with 178 global asset owners taking part.

David Harris, FTSE Russell

Harris said: “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.”

The 2019 rate of ESG evaluation and adoption in Europe of 83% is more than double that of North America at 39%. Asia Pacific is in the middle at 67%. The study said lack of stakeholder demand is cited as the key barrier to adopting ESG, particularly in North America.

“Among those who anticipate applying ESG considerations to a smart beta strategy, over three quarters are motivated by avoiding long term risk compared to a little over half last year,” added the report. “62% are motivated by societal good.”

Performance and regulatory requirements motivate a smaller proportion of respondents.

In terms of ESG smart beta implementation, asset owners use and consider negative screens more frequently than ESG re-weighting, positive selection or other approaches.

Overall global adoption rates of smart beta reached a record of 58% this year.

“The path forward for the marriage of smart beta and ESG looks promising, as many asset owners reported plans to add to these allocations,” added FTSE Russell.

Green finance

David Schwimmer, chief executive of London Stock Exchange Group, said green finance is a big focus for the company at the FIA’s International Derivatives Expo in London last week.

Schwimme said: “We have listed green bonds, helped define environmental, social and governance standards for issuers and FTSE Russell has been providing ESG data,” he added. “We are very actively engaged and the City of London is taking a leadership role.”

Last week the exchange also said it has acquired Beyond Ratings, which provides ESG data for fixed income.

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