Investors are increasingly looking to incorporate sustainability considerations within their smart beta strategies, highlighting a potential opportunity for product developers, according to research from FTSE Russell.
Smart beta users are increasingly looking to incorporate sustainability considerations within their strategy of choice.
The London-headquartered indexing giant, which is a division of the London Stock Exchange Group, recently conducted a survey of 139 asset owners globally including sovereign wealth funds, corporations, private businesses, pension schemes, family offices, insurance companies, and non-profit organizations.
The results show that 58% of those who are using or evaluating a smart beta approach anticipate applying ESG considerations to their strategy of choice.
This represents a significant increase from previous years where 44% in 2019 and 38% in 2018 indicated their interest in sustainable smart beta.
Nearly half (47%) of respondents who anticipate applying ESG considerations to smart beta expect to increase their allocation to these strategies over the next two years.
The opportunity for product developers seems greatest in the EMEA region where 81% of smart beta users are examining the application of sustainability criteria, up from 73% last year. In contrast, 42% of North American smart beta investors are considering integrating ESG although this is up notably from just 17% in 2019.
While evaluation and adoption of smart sustainability have grown for asset owners across the entire AUM spectrum, appetite is notably higher among larger asset owners with four-fifths (80%) of investors managing more than $10 billion AUM stating their interest. This figure had also grown considerably from 54% in 2019.
Delving into the types of ESG strategies that pique investors’ interest, there is a marked decline in demand for negative screening. Appetite for this approach, which includes the exclusion of ‘harmful’ companies such as those in the fossil fuel or tobacco industries, has sunk from 64% to 48%.
This coincided with growing demand for more sophisticated approaches such as re-weighting based on ESG criteria which increased from 36% to 55%.
Climate risk is a hot topic for asset owners in 2020. Among those who anticipate applying sustainability to their smart beta strategy, low carbon tops the list with two-thirds (64%) indicating they are interested in the theme. This is followed closely by broad environmental considerations (indicated by 59% of respondents), while social and governance themes are also widely considered, both at 55%.
Jaakko Kooroshy, Head of Sustainable Investment Data & Methodologies, FTSE Russell, commented, “Since we first started fielding questions about sustainable investment four years ago, it has attracted a great deal of interest in a short period of time and we realized that it warranted deeper analysis.
“In 2020, we have noted a significant uptick among asset owners worldwide interested in applying sustainability considerations to their smart beta strategies – what we call smart sustainability. This is reflected in our work with our clients who are increasingly looking to integrate these parameters into smart beta indexes to underlie their portfolio strategies.”
David Harris, Group Head of Sustainable Business, London Stock Exchange Group, added, “The first half of 2020, shaped by a number of factors including the Covid-19 pandemic and increased focus on social justice, is leading asset owners to re-evaluate investment strategies and priorities. Recent events have heightened investors’ focus on environmental and social factors, international cooperation, and their potential impact on the financial markets. Given these large-scale shifts, combining smart beta with climate and sustainability priorities could become an even bigger trend for asset owners, as evidenced by this survey.”