In this research study, we highlight the emerging field of smart beta ESG. We also shed light on investors’ general use of smart beta strategies and ESG in manager selection
The emerging field of smart beta ESG
In this study, we harness information and insights gleaned from interviews and survey responses from 85 investors with collective assets under management (AUM) of GBP 5.8tn. Our primary objective is to improve the market’s understanding of the emerging field of smart beta ESG – which we define as investment strategies that provide exposure to both smart beta and ESG criteria. We also shed light on investors’ general use of smart beta strategies and the use of ESG in manager selection.
Smart beta on the ascendancy
This briefing paper sits at the intersection of two of the most important trends taking place in the global asset management industry. The first is the rise of smart beta. Smart beta is often characterized as an investment style that sits between active management and conventional passive (i.e. market cap weighted passive). There is no industry accepted definition of smart beta – for the purposes of this paper we define it as rules-based investment strategies that deliver exposure to risk premia, such as value, low volatility or quality. Smart beta assets reached the USD 1tn milestone in 2017, up more than 630% from USD 136bn in 2007.1
Smart beta’s growth has been propelled by a combination of low costs and returns potential: smart beta strategies typically cost less than actively managed funds, but offer out-performance potential compared to conventional passive products. According to PricewaterhouseCoopers, passive strategies, including both smart beta and market cap weighted approaches, will account for an estimated 25% of global assets under management by 2025, up from approximately 17% today.
ESG takes off
The second major investment trend is growth in ESG integration. According to the Global Sustainable Investment Alliance, global sustainable investment reached USD 23tn in 2016, up more than 76% from USD 13tn in 2012. While Europe has the largest share of global sustainable assets, Asian and North America are quickly closing the gap, with respective compound annual growth rates of 72% and 23%, compared to 8% for Europe.
