The growth of responsible investing has been one of the most defining trends of recent years in the asset-management industry. Investing along responsible lines is now a major consideration, if not the standard position, for most large asset owners and money managers.
According to a survey from professors at the University of Oxford and Harvard Business School,1 82% of investors integrate environmental, social and governance (ESG) strategies into their portfolios. Responsible investing now represents over a quarter of all professionally managed assets globally.2
The relentless growth of ESG from niche to essential has been driven by shareholder and regulatory pressure, client interest, reputation, and by risk-management goals. The responsible investment market has grown to more than $30 trillion in assets under management in 2018, from $23 trillion in 2016, according to one estimate.3 Consultancy firm Opimas expects ESG assets to reach $35 trillion by 2020.
Several drivers fueling growth
While there has been early recognition that responsible companies can better manage risk and avoid unforeseen value-destroying events, there has also been growing acceptance that ESG considerations can help returns. The latter has been backed by many research studies showing a positive correlation between ESG considerations and financial performance.4
Responsible investing is winning over the world of passive investing too. During last week’s Inside ETFs event in Florida, I noticed huge interest in the topic in every conversation and panel. Investment inflows support this: assets in ESG exchange-traded funds (ETFs) and products increased 34% last year, despite plunging equity markets, compared to 4.6% for all ETFs listed globally.5
The raw numbers should not divert us from the key focus: the growth in ESG assets means more power to drive change and to impact our world. Providing the right ESG tools to investors is a clear win-win for everyone.
Europe leading the way
Europe has been at the frontline of responsible investing, and now accounts for half of the global assets under responsible-investingmanagement.6
At STOXX we have accompanied this journey since introducing the STOXX® Global ESG Leaders Index in 2011. Our responsible investingfamily now includes more than 80 ESG/Sustainability and Low Carbon indices. They cover a wide variety of approaches – from tracking sustainability pioneers to those companies making the most progress towards a low-carbon economy – and include negative exclusion criteria as well as positive scoring.
The indices are the result of partnerships with leading sustainability data providers, including Sustainalytics, CDP and ISS ESG. This collaboration is indispensable as demand shifts to increasingly complex solutions that require integration of granular data from various sources.
A step to facilitate ESG
One way in which we believe we can facilitate the adoption of ESG approaches is to standardize exclusion criteria to create ESG-compliant versions of well-established benchmarks.
This was the aim of the launch in November of the STOXX® Europe 600 ESG-X Index, a version of Europe’s popular benchmark that excludes companies based on norm- and product-based screenings. This first ESG-compliant benchmark meets the standard responsible policies of leading investors.
The STOXX Europe 600 ESG-X tracks the STOXX Europe 600 Index minus those constituents involved in certain activities. These include businesses that produce or distribute controversial weapons, are tobacco manufacturers, generate or consume thermal coal, as well as those in breach of any of the 10 United Nations Global Compact principles.
ESG exclusions remains the most widely adopted responsible policy in Europe, covering 9.5 trillion euros in assets under management.7 Controversial weapons and tobacco are the most popular exclusions. In the US, ESG integration – the systematic inclusion of ESG parameters into financial analysis – is more popular.8
Easier and cheaper ESG investing
An important step in the world of ESG investing takes place on Feb. 18, when the first European futures contracts on three ESG benchmark indices – the STOXX Europe 600 ESG-X Index, EURO STOXX 50® Low Carbon Index and STOXX® Europe Climate Impact Ex Global Compact Controversial Weapons & Tobacco Index – will be listed on Eurex.
The new ESG derivatives will further enable the implementation of passive ESG strategies, increase liquidity and help lower the cost of portfolio trading. Investors will have both benchmarks and futures that meet ESG principles, bringing about a new chapter of easier and cheaper ESG investing.
And there is more to come. STOXX plans to introduce other ESG-compliant benchmarks and new responsible-focused strategies. We are also working on expanding the ESG menu to include investment solutions that add factor and low-risk criteria.
The future looks very bright when it comes to ESG investing. STOXX is proud to help pave this path to a fairer and more sustainable world.
- STOXX® Global ESG Leaders Index
- STOXX ESG and Sustainability Indices
- STOXX Low Carbon Indices
- STOXX® Europe 600 ESG-X Index
- EURO STOXX® 50 Low Carbon Index
- STOXX® Europe Climate Impact Ex Global Compact, Controversial Weapons & Tobacco Index
1 Amel-Zadeh, A. and Serafeim, G. ‘Why and How Investors Use ESG Information:Evidence from a Global Survey,’ Financial Analysts Journal, Volume 74, Issue 3, Third Quarter 2018.
2,6 GSIA, ‘Global Sustainable Investment Review,’ 2016.
3 Opimas, ‘ESG Data: Mainstream Consumption, Bigger Spending,’ Jan. 9, 2019.
4 DWS, ‘ESG & Corporate Financial Performance: Mapping the global landscape,’ December 2015.
5 Data from ETFGI.
7 Eurosif, ‘European SRI Study.’
8 USSIF, ‘Report on US Sustainable, Responsible and Impact Investing Trends 2018.’