Insights | Smart sustainability: Giving pension providers controlled sustainable exposure

Recently, a major shift has been observed among asset owners who once took a “tokenistic” approach toward environmental, social and governance (ESG) and are now looking to integrate it into core investment strategies. The pensions industry is considering ESG themes, including the transition to a green economy, as an integrated part of their investment philosophy and processes. Asset owners, including defined benefit schemes, are citing ESG risks as central to their fiduciary responsibility. FTSE Russell recently surveyed 200 asset owners globally and asked what their strongest motive was for incorporating ESG considerations into their investment decisions. The top motive was not “societal good” but rather “avoid long term risk.”

In responding to these trends and meeting the changing requirements of our clients, FTSE Russell has developed an approach that combines a commitment to ESG with the sophistication of smart beta indexes. We call this combination of sustainable parameters and risk premia via factor exposure within a single index solution “smart sustainability”.

The launch of the innovative FTSE4Good Index 15 years ago was one of the first clear and decisive moves into the sustainable space by an index provider. At the time, the index appealed largely to the retail rather than the institutional market. However, in the intervening years we have seen a profound change in asset owner attitudes toward ESG, with a growing appreciation of the economic drivers associated with sustainability, as well as the reality and growing risks associated with the transition to a green economy.

This trend has been reinforced by layers of multinational, institutional- and country-level legislation and directives designed to mitigate global warming, improve corporate working practices, and strengthen corporate governance. In relation to climate change these include—and are often framed by—the over- arching Paris Agreement (made between 195 governments in 2015) that aims to limit increases in global average temperature to less than 2°C above pre-industrial levels.

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