Mark Makepeace, chief executive of index provider FTSE Russell, said sustainability will be used for portfolio construction in the same way as smart beta factors over the next 15 years.
Makepeace spoke at a conference, Past-Present-Future of Sustainable Investing, this morning which also marked 15 years since the launch of the FTSE4Good Index Series for environmental, social, and governance investing.
Companies meeting specific thresholds for ESG practices are included in the index series with regular reviews to ensure that they continue to meet the criteria. Over the past 15 years approximately 1,000 companies have improved standards so they can be included in the FTSE4Good indexes but approximately 500 have also been deleted. At launch there were 525 companies in the indexes and there are currently 830 out of a universe of more than 3,000.
In addition the ESG areas covered by the criteria have grown from just three to 14 themes and the number of indicators assessed has grown from around 40 to more than 300 data points across industries, sectors and countries.
Makepeace said that in 2001 there were a small number of social funds whose strategy was base on exclusions. Since then, there has been a shift to engagement and sustainability has become an important part of the investment process and risk management framework.
“Over the next 15 years there will be greater dialogue on sustainability between companies and institutional investors but also more dialogue directly with asset owners,” predicted Makepeace. “There will be customised benchmarks for smart sustainability, in the same way that smart beta factors are used now.”
Smart beta indexes are not weighted by market capitalisation like standard indexes but customised for other factors such as low volatility, earnings quality or momentum.
The growth in sustainable investing is demonstrated by assets under management pledged to the United Nations-backed Principles for Responsible Investment doubling since 2011 to more than $60 (€56) trillion from 1,500 signatories. In September last year Japan’s Government Pension Investment Fund signed up to the PRI. The Japanese pension fund is the largest in the world with approximately Y137.5 ($1.2) trillion of assets.
David Harris, ESG director at FTSE Russell, said at the conference that the pace of change for ESG reporting is growing fastest in Asia Pacific.
“Next February we will be launching guidance with the London Stock Exchange Group on good practice for reporting on sustainability which will drive global harmonisation,” added Harris.
The United Nations Conference on Trade and Development said yesterday that two exchanges have introduced new standards on sustainability reporting as part of the UN’s Sustainable Stock Exchanges initiative. However another 21 have committed to introduce new standards this year or in the first quarter of next year.
James Zhan, director of the division on investment and enterprise at UNCTAD, said in a statement: “We know that many of them are close because they have posted draft guidelines on their websites for comment and discussion. Sustainability reporting has come of age.”
To mark 15 years FTSE Russell, owned by the London Stock Exchange Group, today launched the FTSE4Good Emerging Markets Index and FTSE4Good Emerging Latin America Index, extending the series to over 15 indexes.
FTSE Russell also released its enhanced ESG Ratings data model, which provides underlying environmental, social and governance data on more than 4,100 companies across more than 300 indicators. The model gives investors the ability to screen and analyze companies on their ESG practices to manage their risk exposure and implement ESG-aware investment strategies.