A smarter take on ESG data
With nearly two decades of sustainable investment experience, FTSE Russell has one of the longest pedigrees in ESG data and indexes. David Harris, Head of Sustainable Investment, FTSE Russell and Group Head of Sustainable Business, LSEG, talks about the index provider’s approach to sustainable investment.
How does FTSE Russell’s approach to sustainable investment data differ from that of its peers?
Historically our starting point has been benchmarks and indexes. That means we need the right kind of data to underpin those indexes. Our approach has therefore been focused on clear, data-driven, transparent, rules-based methodologies. Other providers have their roots in sell-side sustainability boutiques and tend to be more analyst- than data-driven. The benefit of our approach is that the data should be more objective and consistent.
We have developed two core models. Our ESG Ratings and data model is the engine for the FTSE4Good Index Series, as well as a range of other sustainable investment indexes. The ESG data and Ratings cover 14 ESG themes, looking at how a company operates such as how well it manages governance issues, how it interacts with stakeholders and its operational environmental performance. Our Green Revenues data model, which underpins our FTSE Environmental Markets and FTSE Green Revenues indexes, looks at a company’s outputs and the proportion of revenue it derives from products and services that enable the transition to a more sustainable economy.
What type of climate data do you provide, and how does that feed into your indexes?
Much of the early work on climate focused on risk – carbon emissions, and then stranded assets. There is a much bigger industrial change underway in the low-carbon transition, in the rise of green industries. This isn’t only about renewables, but affects most industries – advanced batteries, sensors for the construction sector, desalination, high efficiency lighting etc. It’s why investors need a broad taxonomy and dataset to understand what exposure different companies have to the green economy. As a member of the EU High Level Expert Group on Sustainable Finance, this is also closely aligned with the concept of the EU Taxonomy.
Within our ESG model, we’ve aligned the climate theme with the Task Force on Climate-Related Financial Disclosures, and this forms the basis of the data we provide to the Transition Pathway Initiative. It’s helping investors understand management capacity and the extent to which companies are putting the right climate strategies in place.
Beyond Ratings, now part of our group, has also been developing new innovative climate risk data and analytical models, including considerations for fixed income portfolios.
FTSE Russell offers ‘Smart Sustainability’ indexes that combine ESG and conventional financial factors such as value, quality and size. What is the investor rationale for their use?
One of the biggest trends in investment over the last couple of decades has been the rise of smart beta. Rather than simply investing using a pure, market-cap weighted approach, investors can capture different risk premia – from factors such as value, momentum, etc. – in highly efficient, rules-based smart beta indexes. This is taking market share both from traditional passive indexes as well as some simple active strategies.
Until recently, smart beta indexes have been quite separate from sustainable investment, but those worlds are starting to come together. Once an investor has made the decision to switch to smart beta, it’s a relatively easy process to incorporate ESG factors such as around climate. Our 2019 Smart Sustainability survey of global asset owners showed that around half of asset owners either anticipate or already apply ESG to their smart beta strategies.
How is FTSE Russell’s ESG data aligned with the SDGs, and how can investors use it to measure progress on the goals?
It’s important to be clear. The Sustainable Development Goals were developed by governments and the UN, and only a very small number of the underlying targets are applicable to corporates. However, we’ve taken all our different sustainable investment datasets and mapped them to the SDGs to examine which are aligned. That provides a starting point to consider how to look at the SDGs when looking at corporate issuers.
Also, we’re talking about alignment, not impact – you can achieve impact with targeted private equity, with green bonds and through engagement, but not simply by allocating to funds based on a broad equity index, unless there is associated investor engagement. The SDGs offer a high-level framework that can be mapped against our various sustainable investment datasets, such as our climate action, labour standards or controversial weapons themes. This allows investors to tilt their indexes and portfolios towards companies that meet their investment objectives.
This will also be complemented by Beyond Ratings, who has developed some powerful approaches here, including models to capture SDGs for government bond portfolios.
A growing number of investors are applying ESG factors to cross-asset products: does the availability of ESG data beyond equities and corporate fixed income limit the scope of such products?
There has been limited capability around fixed income, but that’s changing. FTSE Russell is the only index provider with significant capabilities globally across both equities and fixed income. This will enable us to deliver research-driven multi-asset solutions in sustainable investment to our global client base.
This article first appeared in Environmental Finance Magazine. For more information on ESG, see: www.ftserussell.com/sustainability-and-esg-data
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