Sustainable investing is an established part of the investment universe that can enable financial firms to manage their decarbonisation strategies, align with international frameworks, perform risk management, conduct performance analysis and contribute positively to society. However, investors that pursue a sustainable investing strategy rely on access to best-in-class data, insights and indexes to make critically important, informed investment decisions.
- The next phase of sustainable investing is being shaped by regulation.
- FTSE Russell’s index expertise complements Refinitiv’s ESG data and has led to new product innovation and solutions for customers.
- By creating a FTSE Russell index using Refinitiv ESG data, we produced an index with a 10 percent improved ESG score
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There is compelling evidence that sustainable investing is now a mainstream strategy:
- More institutional investors are exploring environmental, social and governance (ESG)/sustainability considerations than ever before. The FTSE Russell 2021 global survey of Asset Owners finds that 84 percent of asset owners globally are evaluating or implementing sustainable investment considerations in their strategies, up from a little over half (53 percent) in 2018.1
- While active ESG equity estimated net flows are hovering around zero (meaning about as much AUM is flowing out as flowing in), ESG passive equity AUM estimated net flows are positive and have even been ticking up H2 2021.
- Refinitiv Lipper data indicates that while overall passive estimated net flows remain in positive territory, passive ESG AUM is steadily increasing month over month (based on global AUM ESG Funds from start of 2016).
Global estimated net flows – active and passive2
Standards and regulations require more transparency, which is shaping the next phase of sustainable investing globally.
ESG data gaps, the role of regulation, climate risk urgency and index product innovation are front of mind for FTSE Russell and Refinitiv, London Stock Exchange Group’s (LSEG) investment solutions providers.
The combined strength of FTSE Russell and Refinitiv sustainable investment solutions can help investors meet their sustainable investing challenges ahead.
Making more possible for financial firms
LSEG’s acquisition of Refinitiv increased opportunities for financial firms in the sustainable investment space by bringing together a range of sustainability propositions offerings and creating an enhanced portfolio of capabilities.
FTSE Russell’s index expertise complements Refinitiv’s ESG data and has led to new product innovation and solutions for customers.
These advances include the September 2021 Russell U.S. ESG Indexes, a suite of six indexes that is a broad-based, alternatively weighted, U.S. equity index family.
The index suite is designed to measure the performance of mega-cap to micro-cap securities that meet improved index-level ESG profile, while maintaining similar risk and return characteristics to the underlying universe.
Customers can choose from two sub-index families, each with different levels of exposure to ESG:
Russell ESG Screened Target Exposure Indexes
This sub-family of indexes applies a negative screening approach, by excluding companies based on certain business operations or product involvement. Companies are also excluded that potentially breach the United Nations Global Compact principles.
Russell ESG Enhanced Target Exposure Indexes
With the same negative screening approach as the ESG Screened indexes, this sub-family of indexes also applies Refinitiv ESG Scores as a tilt to provide an ESG lens on the U.S. equity universe.
Achieving improved ESG scores
By applying the Refinitiv ESG scores into FTSE Russell’s Target Exposure Index methodology we can produce an index with a 10 percent improved ESG score that is still investable and performs similarly to the benchmark.
The Refinitiv ESG Score framework is designed to measure a company’s ESG performance, commitment and effectiveness transparently and objectively across 10 main themes based on publicly reported data.
The scores are a data-driven assessment of companies’ relative ESG performance and capacity, integrating and accounting for industry materiality and company size biases. Specifically, the scores measure a company’s ESG performance based on verifiable reported data in the public domain.
The scoring methodology captures over 500 company-level ESG measures. And a subset of 186 of the most comparable and material, per industry, power the overall company assessment and scoring process.
FTSE Russell’s target exposure approach provides a transparent mechanism for exercising complete and precise control over both investment and ESG objectives.
Russell 1000 ESG Enhanced Target Exposure Index vs Russell 1000
As the indexes are suitable substitutes for the traditional benchmarks, financial firms can use them in a number of ways.
You can benchmark the performance of U.S. equity funds or to create exchange-traded funds (ETFs), structured products and index-based derivatives transparently and objectively or as an ESG alternative for core U.S. market cap-weighted, passive mandates and model portfolios.
1. FTSE Russell, Sustainable Investment: 2021 global survey findings from asset owners.
2. Refinitiv Lipper, September 2021. Past performance is no guarantee of future results.