Combining ESG and smart beta; ‘Smart Sustainability’

Global asset owner survey explores the emerging investment trend of Smart Sustainability—the integration of ESG considerations into smart beta—a trend that looks set to continue.

There is rising interest in investment strategies with an ESG focus. At the same time, asset owners are allocating steadily higher portfolio weightings to non-market-capitalisation (‘smart beta’) index-based strategies.

Unsurprisingly, therefore, asset owners told FTSE Russell that they are interested in combining ESG with smart beta when constructing portfolios, a practice we’ve named ‘Smart Sustainability’.

Over the past three years, our annual smart beta survey of global asset owners has included questions about applying ESG considerations to smart beta strategies. Among those respondents who are using or evaluating smart beta, 44 percent (worldwide) said they anticipate applying ESG considerations to their smart beta strategy.

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For survey respondents who said they were considering the addition of ESG to a smart beta strategy, the most commonly cited reason for doing so was to avoid long-term risk.

Compared to 2018, there has been a big jump in the percentage of respondents citing the avoidance of long-term risk as a motivation for adding ESG to smart beta. This chimes with rapidly increasing public concern about climate change, pollution and sustainability.

What is your motivation for applying ESG considerations?

Multi-pick. Segment = Anticipate applying ESG considerations to a smart beta strategy.

In turn, the same cohort of survey respondents cited governance, carbon and social issues as the top three ESG issues they wished to address in a combined smart beta/ESG allocation. 

What ESG issues are you considering using in a smart beta and ESG allocation?

Multi-pick. Segment = Anticipate applying ESG considerations to a smart beta strategy.

The outlook for Smart Sustainability is strong

Interest in combining ESG with smart beta was seldom driven by ESG considerations alone: only 20 percent of asset owners gave this as their reason for investigating combined ESG/smart beta investment strategies.

Instead, around three-quarters of respondents said that their interest was driven primarily by smart beta, or by both smart beta and ESG.

Was your interest in smart beta and ESG motivated primarily by smart beta, primarily by ESG or both?

Segment = Anticipate applying ESG considerations to a smart beta strategy.

In aggregate, the demand for Smart Sustainability is strong: nearly half of those who anticipate applying ESG considerations to a smart beta strategy expect to increase their allocation to smart beta ESG, while 42 percent are undecided.

And demand is strongest among the largest asset owners. For those survey respondents with assets under management in excess of $10B, 58 percent expect to increase their allocation to smart beta and ESG during the next year or two.

Do you expect to increase your allocation to smart beta ESG over the next one to two years?

Segment = Anticipate applying ESG considerations to a smart beta strategy.

The survey suggests that through a desire to reduce investment risks to issues like climate change, we will see increasing growth of Smart Sustainability.

Get your copy of the 2019 Global Smart Beta Survey of Asset Owners and the special Smart Sustainability supplement.