New index series helps clients integrate ESG and climate objectives into UK equity portfolios, such as part of a ‘broader mission’ to build out a range of country-specific indexes.
FTSE Russell’s recently launched FTSE UK ESG Risk-Adjusted Index Series combines ESG scores, carbon emissions measures including reserve intensity, and exclusions into a broad ESG index series that “fills gaps” across its product range for responsible investors .
Aled Jones Head of Sustainable Investment Solutions at FTSE Russell, told ESG the new index series is part of its plans to further expand its multi-asset ESG and climate index product range.
The new index series is “a new tool in the toolbox” for clients, he said, with this index covering “broad, more obvious” ESG risks for the UK market. Customer demand for such a product has increased over the past 18 months, he added.
While the index provider already has products for investors who want to “go all-in on climate,” and others for investors who are “focused on exclusions,” there is a gap for a broad ESG index, which Jones said this new product will will do. to fill.
“Our intention with this new series is to deliver something that works from both an ESG and investment perspective, while still being backed by FTSE Russell’s transparency, robust governance and in-depth data and research,” said FTSE Russell in a statement.
The series applies a range of product and behavioral exclusions and significantly reduces carbon emissions, while maintaining exposure to the underlying FTSE 100, FTSE 250, FTSE 350 and FTSE Allshare benchmarks.
Arne Staal, CEO of FTSE Russell, said it created the FTSE UK ESG Risk-Adjusted Index Series to “further increase the opportunities for clients integrating ESG and climate objectives into UK equity portfolios”.
“As we continue to expand our multi-asset ESG and climate index range, this launch is also our first ESG-tailored version of the FTSE 100, and something our clients have been asking for,” he added.
Recent data shows that product development and investor demand for passive ESG investment options have increased over the past twelve to eighteen months.
Hortense Bioy, Global Director of Sustainability Research at Morningstar, recently said that ESG ETFs are now “on par with regular non-ESG ETFs.” She also highlighted the lower costs and higher transparency of passive ESG strategies compared to active, with Morningstar’s latest European Active/Passive Barometer report labeling active funds as having ‘lackluster performance’.
This is evident from Morningstar’s recent Global Sustainable Fund Flows reportpassive strategies now represent almost a quarter of global ESG fund assets. It also said that passive strategies were responsible for six of the ten best-selling sustainable products globally in the fourth quarter of 2022, generating a total of $6.7 billion in net new money.
Bioy said the growth of passive ESG funds is a “direct result of technological advances,” including in indexing, and improved ESG data. “You can’t index if you don’t have data. Index providers are hungry for new data, that’s how you innovate.”
Robust and investable
According to Jones, the exclusions from the company’s Russell US ESG index series are aligned with the FTSE UK ESG Risk-Adjusted Index Series as part of a “broader mission to build out a comparable set of indexes across specific country universes.” .
“By shifting the exposure or weights in the index to companies with better ESG scores, exposure to fossil fuel carbon emissions and carbon reserves is significantly reduced,” he added.
The new index does not completely rule out investments in fossil fuels or carbon-intensive companies, as this would require the exclusion of a “large portion of the benchmark,” Jones said.
“About 20% of the weight of the underlying universe is actually energy and materials companies, most of which own fossil fuels,” Jones added. “If you do that, you eliminate quality companies and end up at a substantially different endpoint.”
He emphasized the importance of “balancing these parameters” to create an index that is “robust from an overall ESG perspective, but also provides an investable outcome.”
The index series applies a range of product and conduct exclusions, including controversial weapons, thermal coal production, thermal coal power generation, Arctic oil and gas exploration, oil sands and shale energy extraction and production, tobacco production and retailing, and controversial behavior.
FTSE Russell said these “significantly reduce” the index’s carbon emissions and reserves exposure relative to the underlying benchmark, and “tilt the weights of the universe towards companies with better ESG characteristics”.
Jones said the exclusion of thermal coal and unconventional oil and gas sources such as Arctic oil and oil sands and shale gas “addresses the most carbon-intensive sources of fossil fuels.”
He added that a British index series that excludes fossil fuels is “something we could create” in response to demand, but underlined that it would be a “very different kind of product”.
“Ultimately, we want investors to have the choice to reflect different objectives that we see in the market,” Jones said.
Jones said the new Potential customers of index series may include ETF providers, but also other fund managers and their institutional clients, derivatives providers or structured products agencies.
“Our ambition is to expand our index range to include fixed income and equities based on ESG and climate priorities, including areas such as real estate and listed infrastructure,” Jones said.
Financial technology company Trackinsight’s Global ETF Survey 2023 states that investors are expanding their use of ETFs, offering the opportunity to “develop better suited strategies for financial markets characterized by significant uncertainty.”
Three in ten respondents to the survey said they planned to increase exposure to ESG-focused and sustainable ETFs, 35% in EMEA and APAC, and 25% in the US, but the report noted that very few respondents were actively Using ETFs for their activities. ESG stocks or their ESG fixed income strategies.