At Qontigo, the new era of sustainable investing and net-zero transition will be defined collaboratively and cooperatively across all parties of the financial ecosystem.
The Glasgow Financial Alliance for Net Zero (GFANZ), which now has over 550 members, has a widespread presence at COP27, the 2022 UN Climate Change Conference. Qontigo is a signatory of the Net Zero Financial Service Providers Alliance (NZFSPA), the sector-specific alliance gathered under GFANZ.
This represents a profound moment for the global investment community as asset owners, money managers, regulators, corporations, not-for-profits, academia and service providers collaborate to make net-zero targets a functional reality. Yet, as GFANZ has argued, alongside mitigating risks, protecting values and accompanying the transition, investors are also keen to lead this transformation through real-world outcomes of their investments.
Index providers as agents of engagement
Corporate engagement — deemed as one of the most powerful mechanisms to create tangible impact in public markets — is a key pillar of decarbonization protocols that GFANZ members have adopted. However, as demonstrated by a discussion paper published by the Principles for Responsible Investment, engagement in the passive-investing space has traditionally been a subject of doubt. Constraints include a lack of clear voting mechanisms, limited research support, and the high cost of engaging with a large set of index constituents.
Qontigo, administrator of STOXX and DAX indices, questioned this notion by launching a unique corporate engagement campaign in the passive investment space.
Since February 2022, our sustainability experts have engaged with the companies that belong to our STOXX Paris-aligned (PAB) and Climate Transition Benchmark (CTB) Indices through dialogue, surveys, letters and one-on-one meetings to explain the impact that climate-related metrics can have on index composition.
Through the inclusion of a combination of forward-looking climate metrics and time-based progressive criteria, the STOXX PAB and CTB indices have been designed to encourage corporate engagement in addition to exceeding the EU regulatory requirements.
The purpose of our engagement effort has been twofold:
- to encourage and play a role in an effective net-zero transition and
- to ensure alignment with index constituents on climate performance expectations and metrics used to assess them.
Scientifically verified metrics
Data-driven quantitative passive strategies are growing fast, with climate-related strategies attracting this year the bulk of fund flows globally in the ESG ETF category. Unlike active strategies that can be supported by fundamental, bottom-up research on individual constituents, index-driven climate strategies rely solely on quantitative metrics. With climate action becoming an ever-stronger pillar in portfolio construction, scientifically verified measures of climate performance by businesses are becoming an invaluable data point. Furthermore, given the mounting scrutiny around greenwashing claims, investors are increasingly seeking explainable metrics to avoid such accusations.
We believe index providers have a role to play — just as other participants in the financial ecosystem do — to ensure clarity, alignment and a common understanding of effective climate performance measures and portfolio construction criteria.
This can be done not just with robust index methodologies, but also by providing transparency and maintaining two-way communications with both investors and index constituents.
As part of our commitment under the NZFSPA, we aim to follow the best available scientific guidelines in net zero-aligned product creation and disclosure, support innovation and work collaboratively with all our key stakeholders towards achieving climate targets. We seek to encourage best practices in climate alignment amongst our investee companies, and also to understand their challenges in incorporating and disclosing climate-related targets.
Based on our engagement experience and given the options available, we recommend index providers should consider:
- creating indices that have inbuilt over-time progressive exclusion/reweighting criteria. These can act as default escalation strategies, where investors can penalize those companies showing insufficient action.
- designing indices that include engagement guidelines for investors in alignment with the stated climate objective.
- engaging with companies to highlight specific climate-related quantitative signals and methodologies that are being used in index construction.
Corporate engagement is an immensely powerful tool to create real-world impact. At Qontigo, we think our pilot engagement can be used as a case study for the indexing industry to adopt this practice on a larger scale.
More details on this engagement will follow next year.
* Saumya Mehrotra is Associate Principal for Sustainable Investment at Qontigo