ESG indexes before and after Covid
The Covid pandemic has encouraged ESG index providers to take a broader view of sustainability, Simon Vinatea and Thomas Montagnon of Vigeo Eiris’s index business tell Environmental Finance
Environmental Finance: Vigeo Eiris is best known for producing ESG ratings, but the firm is also involved with helping investors develop indexes. How do the two parts of the business fit together?
Simon Vinatea, Head of Index & Data Solutions, Vigeo Eiris: Yes, our primary activity is to produce ESG ratings, but we’ve always worked closely with investors to help them develop investment vehicles to promote responsible and sustainable investment. Investors today face a large volume of ESG data, with different methodologies and purposes. It can be difficult to navigate.
When investors are looking to purchase our data to build an index, who is better placed to help in the selection of the data points and build a meaningful strategy than the agency that actually produced those data points? That’s why we propose our support and the in-depth knowledge of our analysts about the data to help investors to build their index strategy.
It’s worth highlighting that our clients come to us for the same reason they come to us for traditional ESG purposes – and that’s the stability, over time, of our sustainability methodology. Long-term data is key in the index business because it allows you to back test to validate an investment strategy.
EF: What methodological approach do you take to index construction?
SV: To be clear, we are not an index provider – we are an ESG data provider and we give guidance on construction, but we do not administer indexes.
The first step is to understand the story of the index – its theme, whether climate, social, or best-in-class. That guides us in the selection of the right data points. The second step is to establish the rules that will define the index universe, for example, a threshold on the percentage of revenue from the production of coal. The next step is to conduct the back test, to look at its historical performance to see if the index is robust enough in terms of financial performance. At that point, the client is ready to launch the index.
After launch, we also support the client throughout the life cycle of the product, including with rebalancing the index. At regular periods, whether every month or quarter, we update the data and change the index composition accordingly.
EF: What sort of demand are you seeing for index development?
SV: There are ‘before Covid’ and ‘after Covid’ answers. Before, there was a focus on the ‘E’ in ESG, with a lot of demand for environmental and climate indexes, driven by regulations and politics pushing investors in that direction. At the same time, the market was becoming saturated with ‘classic’ environmental indexes, so clients were seeking to distinguish themselves with more thematic strategies, such as a biodiversity, as well as water and forest protection indexes.
Now, however, there is a renewed interest in social thematic indexes, such as the social aspect in supply chains, community involvement, etc. That’s a positive: it brings greater diversity into the market and it is good to remind investors that it’s important to address social as well as environmental issues.
EF: You mention biodiversity – you’ve just launched a biodiversity index with Solactive. How does that work?
Thomas Montagnon, Sales Manager, ESG Index Solutions, Vigeo Eiris: We work with banks, asset managers, stock exchanges, and index providers such as Solactive. Here, we were asked by them to help build an index on the biodiversity theme; they approached us because we had previously published some research on that subject.
After a long discussion, we designed an index that enables investments – through exchange-traded funds and structured products or derivatives – in companies that integrate biodiversity protection in their corporate social responsibility strategies, and those which provide sustainable goods and services related to biodiversity, such as bio-based chemicals, recycling services, water quality preservation, etc.
It was really important not only to use a quantitative approach for the methodology but also to analyse deeply the contribution of the companies to biodiversity protection. We have thus chosen to approach this theme as an investment opportunity by participating in the protection of the Earth's resources while promoting good prospects of future returns for the investor. We believe that the proper functioning of the global eco-system is as important for the well-being of mankind as it is for the economy.
It’s important to note that we weren’t involved in the financial weighting of the index. We leave those elements in the hands of our clients.
EF: What are your plans for the index part of the Vigo Eiris business?
TM: We hope to consolidate our position as a leading provider of ESG data for European retail-structured products while stepping up the development of new areas where we have some presence, such as ETFs and derivatives markets. We’re also looking to expand globally, in Asia and the US market. Our main objective is to promote our approach to ESG among all big financial players and help them put the right ESG investment tools in the hands of their clients.
For more information, see www.vigeo-eiris.com