The strong growth in ESG investments calls for both harmonization of rules and more differentiated investor options, according to Rodolphe Bocquet, Qontigo’s Global Head of Sustainable Investment.
Speaking during a panel at the Eurex Derivatives Forum Frankfurt 2021, Rodolphe said that while both ideas may appear at odds, it is important to offer investors common standards on investment products and data, but also to create more choices of custom solutions that cater to individual needs.
“Given the unprecedented growth in ESG-related assets under management, we face a paradoxical trend where we have a simultaneous need for standardization on the one hand and more customization on the other hand,” he said. “Both will bring opportunities and challenges.”
Regulation has played a big role in promoting and shaping sustainable investing in recent years. New rules from governments and exchanges have gone hand-in-hand with a rising number of signatories to the Principles for Responsible Investment (PRI).
According to Rodolphe, ESG standardization is currently running along three pillars: firstly, the push to develop universal non-financial corporate disclosures; secondly, legislation that seeks to classify investment products along clear and well-defined sustainability categories (including the European Union’s Taxonomy, Climate Benchmarks regulation and Sustainable Finance Disclosures Regulation); and finally, initiatives to regulate sustainability scores and data providers.1
While rules can bring benefits to investors, policymakers need to be mindful of potential conflicts between different legislative frameworks and fragmentation across national lines, Rodolphe told the audience.
Different solutions for different users
Customization, on the other hand, will be key to a successful roll-out of sustainable investment strategies.
“There is no one-size-fits-all for sustainable investments,” he said. “Sustainable investing is really very much about investors’ preferences.”
Rodolphe explained how STOXX indices reflect the variety of expectations and needs among investors. From indices that implement standard responsible exclusions, to those that integrate ESG metrics into portfolio construction, to upcoming ones that maximize the ESG tilt while keeping a low tracking error to benchmarks.
This menu of options will soon be complemented with impact-oriented indices that base stock selection on tangible measurements of the effect of companies’ operations and products on societies and the environment.
“Impact is a new trend where investors not only care about integration but also want to demonstrate the real-world outcome of the product they invest in,” said Rodolphe. “Climate change being at the top, but also for social and governance issues.”
Climate data and the role of indices
During an earlier panel on the role of carbon pricing in sustainable finance, Rodolphe also highlighted the ‘blessing’ that global warming can be quantifiable, enabling the integration of climate action into investment products.
Here, the EU’s Climate Benchmarks regulation has shown the way forward in helping investors align portfolios with decarbonization pathways that meet the criteria of the 2015 Paris Agreement, Rodolphe said.
“There has been a growing interest by the investor community to monitor the alignment of portfolios with some climate objectives,” he said. “What we have done at Qontigo is we’ve gone above and beyond the EU regulation.” Rodolphe explained how the STOXX Climate Benchmarks exceed the required decarbonization threshold and uniquely include forward-looking metrics to progressively exclude companies that have not committed to science-based targets.
Rodolphe concluded his participation by answering a question on whether he expected carbon pricing to eventually become integrated into equity indices.
“Going forward we may have better ways and better tools to embed the impact of carbon prices into these indices,” he said. He added that work commissioned by banking regulators2 “sets a framework and paves the way for methodological developments that will allow eventually to include the impact of carbon prices on companies’ profitability into climate indices.”
1 See ‘ESMA calls for legislative action on ESG ratings and assessment tools,’ ESMA, Jan. 29, 2021.
2 See European Central Bank, ‘Guide on climate-related and environmental risks,’ November 2020; and Network for Greening the Financial System, ‘Guide to climate scenario analysis for central banks and supervisors’, June 2020.