Global asset owners incorporating ESG factors in smart beta strategy
Almost half of global asset owners anticipate applying ESG considerations to their smart beta strategy of choice
Asset owners increasingly intend to integrate ESG parameters especially climate risk into smart beta indexes, according to a 2019 global survey on Smart Sustainability conducted by FTSE Russell.
FTSE Russell defines smart beta as an investment strategy that applies an index-based investment strategy that is not traditionally market cap-weighted such as fundamentally weighted, equal-weighted, factor weighted, or optimized.
Among asset owners who anticipate applying ESG considerations to a smart beta strategy, 78% are motivated by avoiding long-term risk followed by societal good at 62%. A smaller proportion of asset owners are motivated by improving performance and fulfilling regulatory requirements.
Europe is leading the way with applying ESG considerations to smart beta, with over 75% of European asset owners evaluating or using smart beta expecting to do so. This compares with 17% for asset owners in North America, who feel that a lack of stakeholder demand is the key barrier in applying ESG factors to smart beta strategy.
Asset owners also experience other barriers such as insufficient ESG data and disclosure, as well as a lack of resources to evaluate.
Almost 80% of asset owners considered governance as the key issue when using a smart beta and ESG allocation, followed by carbon and social issues.
Both large (over US$10 billion) and mid/small (under US$10 billion) tier Asset Under Management (AUM) asset owners used or considered negative screening as their ESG investment approach when using smart beta and ESG allocation. Additionally, large asset owners are also more likely to use ESG re-weighting.
Half of the asset owners who anticipate applying ESG consideration to a smart beta strategy would do so by default instead of due to the perceived compatibility of these approaches. Almost double the number of large asset owners are more likely to act due to perceived compatibility than mid- or small-tier asset owners.
The outlook for integrating ESG and smart beta seems promising based on the survey results. However, the survey is based on predesigned questions and provides a general observation of the trend. It will be necessary to take a closer look at the efforts of global asset owners in incorporating ESG factors into their smart beta strategy.
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