Sustainable investment ideas and ETFs like those that incorporate environmental, social and governance principles use to be relegated to niche investment styles, but now, institutional investor are incorporating the strategies into core investment positions.
The pensions industry considers ESG themes, such as the transition to a green economy, as an integrated part of their investment philosophy and processes, according to a FTSE Russell note.
While individual investors may incorporate an ESG theme to better align their own beliefs with their investment outlook, institutional investors and large asset owners pointed to the ability to “avoid long term risk” over “societal good” as the main contributing factor.
Supporting the increased spotlight on the sustainable investment theme, there have been a growing number of investor and finance-focused initiatives, including Principles for Responsible Investment (PRI), the Sustainable Investment Forums (SIFs) and the Institutional Investors Group on Climate Change (IIGCC). Others are attributed to regulators or governments, such as the G20 Green Finance Study Group co-chaired by the People’s Bank of China, the Bank of England, and the Financial Stability Board’s Task Force on Climate-related Financial Disclosure, the UK’s Green Finance Taskforce or the European Commission convened High Level Expert Group on Sustainable Finance.
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FTSE Russell’s recent smart beta survey for 2017 reveals the extent of the shift in investors’ mindsets. Among asset owners who are using, evaluating or planning to evaluate smart beta index-based strategies, 57% of larger asset owners, revealed they are applying ESG considerations to a smart beta strategy. Moreover, 69% of respondents pointed to incorporating ESG was to “avoid long term risk”. While the move towards ESG appears to be global, it is most prominent among large European institutional investors.
In both North America and Europe, investor interest in smart and sustainable index-based strategies is strongest among the largest asset owners with AUM greater than $10 billion, Tony Campos, director, ESG product management said in a note. Within this investor-size category, almost 80% of asset owners domiciled in Europe anticipate applying ESG considerations to a smart beta strategy while 30% of asset owners domiciled in North America do, which may leave greater growth opportunity for ESG-related investments such as those in the ETF space.
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