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Blog Posts — May 26, 2020

Q&A with Roberto Lazzarotto: ESG Represents ‘Massive Change’ in Index Space

Roberto Lazzarotto, Global Co-Head of Sales at Qontigo, took part of a panel at etfLIVE on May 20. 

The discussion, held via virtual conference, covered the topic of construction and range of indices underpinning the exchange-traded fund (ETF) market. An insightful exchange of ideas among the panelists led the conversation across the topic of sustainable investing, the number of existing indices and self-indexing. Below are excerpts from Roberto’s participation.

What are some of the biggest changes in the indexing world right now?
“There is a big change that’s taking phenomenal importance and that is the ESG (environmental, social and governance) element. It is not a new trend, but when you look at the evolution of the assets, predominantly over the last three years, there’s been exponential growth” in this field. “The market is getting much more mature, much more ready across financial segments to invest with a more sustainable approach. And you see that happening in various ways and through various streams. You are seeing it at the retail and the institutional level, and even across the highest level of the institutional segment, the asset owners, through various initiatives” trying to drive change in the industry. 

“There is really a big, massive change that leads to broader adoption of everything that is ESG-related. We launched, at the beginning of 2019, a building block of ESG, which is ESG strategies with exclusions. This is the STOXX ESG-X family that went on-exchange. For us, having indices and derivatives on-exchange is a way to address the ecosystem and create wider adoption. 

I think that’s what is changing in the indexing space. We are moving away from the traditional standard index concepts, moving away from the tracking-error element that has been a constraint for so many investors. That’s a massive change, and I think it is for the better.”

Is there cost pressure on index providers?
“Yes. We are consuming a lot of data and the dependency we have on that data is extremely high. Data is a key element and continues to be more and more expensive. On the other hand, there are other processes and services we deliver to clients that have a cost. Moving away from what has traditionally been the index providers’ offering, a very robust service through our benchmarks, we are now offering much more than that. And that has a cost. On top of that, there is compliance; and compliance is a very costly element, as anyone in the financial industry knows. Cost pressure is everywhere; and because other elements in the value chain to bring products to the client are also facing cost pressure, there is additional pressure on index providers to diminish costs. It is an ongoing discussion that is topical for everyone.” 

Do we have too many indices?
There are more indices because “we continue to push the boundaries as to what an investment strategy is and can be. Innovation is all over and it is amazing to participate in this industry that continues to grow” with “new concepts, new features. 

There is another underlying question beyond the number of indices; which is, how many assets really are behind all those indices. I sense that beyond the question of whether there are too many indices, there is this fear of a systemic element that is engineered as the industry continues to grow. There is a little bit of perspective to be put there.” One must differentiate between “the creation of indices because clients have a specific need in some areas, and the bulk of assets that continues to be on standard indices. A lot of the index creation and innovation goes into the more tactical indices, where eventually the fear of a systemic problem would not really be realized.”

Is self-indexing an alternative to indexing outsourcing for asset managers and issuers?
When thinking of self-indexing, “the cost element has to be considered. Being an index provider and being, based on European regulation, a benchmark administrator is costly. There is a temptation by new entrants in the ETF space to go self-indexing. When they face the reality of what it means, that is when they use the services of well- and long-established index providers to perform either a calculation or create a strategy that they have in mind. 

Creating an index is not so straight-forward to make sure that it is investable in its final form. What we experience at STOXX is that we have to work a lot and do it hand-in-hand with the potential asset manager or ETF issuer to make their initial idea” become an index “that can effectively be used as an underlying for an investment product. That is really important.”