A smarter take on ESG data
With nearly two decades of sustainable investment experience, FTSE Russell boasts one of the longest pedigrees in ESG data and indexes. Its head of sustainable investment David Harris talks to Environmental Finance about its latest moves
Environmental Finance: How does FTSE Russell’s approach to sustainable investment data differ from that of its peers?
David Harris, FTSE Russell: Historically our starting point has been benchmarks and indexes. That means we need the right kind of data to underpin those indexes. Our approach has therefore been focused on clear, data-driven, transparent, rules-based methodologies. Other providers have their roots in sell-side sustainability boutiques and tend to be more analyst- than data-driven. The benefit of our approach is that the data should be more objective and consistent.
We have developed two core models. Our ESG Ratings and data model is the engine for the FTSE4Good Index Series, as well as a range of other sustainable investment indexes. The ESG data and Ratings cover 14 ESG themes, looking at how a company operates: such as how well it manages governance issues, how it interacts with stakeholders and its operational environmental performance. Our Green Revenues data model, which underpins our FTSE Environmental Markets and FTSE Green Revenues indexes, looks at a company’s outputs and the proportion of revenue it derives from products and services that enable the transition to a more sustainable economy.
EF: What type of climate data do you provide, and how does that feed into your indexes?
DH: Much of the early work on climate focused on risk – carbon emissions, and then stranded assets. There is a much bigger industrial change underway in the low-carbon transition, in the rise of green industries. This isn’t only about renewables, but affects most industries – advanced batteries, sensors for the construction sector, desalination, high efficiency lighting etc. It’s why investors need a broad taxonomy and dataset to understand what exposure different companies have to the green economy. As a member of the EU High Level Expert Group on Sustainable Finance, this is also closely aligned with the concept of the EU Taxonomy.
Within our ESG model, we’ve aligned the climate theme with the Task Force on Climate-Related Financial Disclosures, and this forms the basis of the data we provide to the Transition Pathway Initiative. It’s helping investors understand management capacity and the extent to which companies are putting the right climate strategies in place.
Beyond Ratings, now part of our Group, have also been developing new innovative climate risk data and analytical models, including considerations for fixed income portfolios.
EF: FTSE Russell offers ‘Smart Sustainability’ indexes that combine ESG and conventional financial factors such as value, quality and size. What is the investor rationale for their use?
DH: One of the biggest trends in investment over the last couple of decades has been the rise of smart beta. Rather than simply investing using a pure, market-cap weighted approach, investors can capture different risk premia – from factors such as value, momentum, etc. – in highly efficient, rules-based smart beta indexes. This is taking market share both from traditional passive indexes as well as some simple active strategies.
Until recently, smart beta indexes have been quite separate from sustainable investment, but those worlds are starting to come together. Once an investor has made the decision to switch to smart beta, it’s a relatively easy process to incorporate ESG factors such as around climate. Our 2019 Smart Sustainability survey of global asset owners showed that around half of asset owners either anticipate or already apply ESG to their smart beta strategies.
EF: How is FTSE Russell’s ESG data aligned with the SDGs, and how can investors use it to measure progress on the goals?
DH: It’s important to be clear. The Sustainable Development Goals were developed by governments and the UN, and only a very small number of the underlying targets are applicable to corporates. However, we’ve taken all our different sustainable investment datasets and mapped them to the SDGs to examine which are aligned. That provides a starting point to consider how to look at the SDGs when looking at corporate issuers.
Also, we’re talking about alignment, not impact – you can achieve impact with targeted private equity, with green bonds and through engagement, but not simply by allocating to funds based on a broad equity index, unless there is associated investor engagement. The SDGs offer a high-level framework that can be mapped against our various sustainable investment datasets, such as our climate action, labour standards or controversial weapons themes. This allows investors to tilt their indexes and portfolios towards companies that meet their investment objectives.
This will also be complemented by Beyond Ratings, who have developed some powerful approaches here, including models to capture SDGs for government bond portfolios.
EF: A growing number of investors are applying ESG factors to cross-asset products: does the availability of ESG data beyond equities and corporate fixed income limit the scope of such products?
DH: There has been limited capability around fixed income, but that’s changing. FTSE Russell is the only index provider with significant capabilities globally across both equities and fixed income. This will enable us to deliver research-driven multi-asset solutions in sustainable investment to our global client base.
For more information, see: www.ftserussell.com/sustainability-and-esg-data
- Environmental data
- Social data
- Governance data
- Indices/Exchange data
What data do you provide?
FTSE Russell has been an innovator in sustainable investment indexes since the launch in 2001 of the FTSE4Good Index Series - one of the longest running global ESG index series. FTSE Russell maintains two core sustainable investment data models: the ESG Ratings and data model assesses listed companies on their operational ESG risks and performance, while the Green Revenues data model classifies and measures company revenue exposure to products that deliver environmental solutions. By splitting our data model into these two dimensions users can determine more specifically whether to target ESG issues related to (operational) risk or (product) opportunities.
For ESG benchmarks, FTSE Russell has the data and expertise to integrate ESG and investment outcomes into a single index solution that meets the client’s needs. This includes achieving broad market returns and index characteristics with improved ESG attributes, integrating ESG into specific factor or smart beta strategies, and selective investments that align with ESG objectives.
Where and how do you source your data?
FTSE Russell's ESG Ratings data relies upon publicly disclosed information (see detailed process below). Our primary sources of data are reports and other disclosures from companies. However, we also supplement this data with other sources, such as governments and NGOs etc.
Data is collected according to the process below, note that some aspects of this may vary but this forms a general outline:
- An analyst collects information using documents made publicly available by the company to determine its operational and geographical exposure;
- A company’s exposure is cross-referenced with a rules-based methodology to determine the applicability of ESG indicators. An analyst uses publicly available documents to assess a company against applicable indicators;
- The company is contacted and provided with an opportunity to highlight other public information that the analyst should consider. Where this feedback is found to highlight data that is more relevant to the assessment, this is incorporated by the analyst and the assessment finalized;
- A rules-based, transparent calculation methodology is used to determine the scores across four levels of data.
The ESG data model is overseen by an independent external committee comprising experts from the investment community, business, NGOs, unions and academia. Companies are researched annually and ESG Ratings are updated on a bi-annual basis in June and November.
Who are the data users?
FTSE Russell’s ESG Ratings data is used by asset managers, asset owners, investment consultants, and academic institutions.
A subset of FTSE Russell’s ESG Ratings is also used for the Transition Pathway Initiative, a global initiative led by asset owners and supported by asset managers that assesses companies’ preparedness for the transition to a low-carbon economy.
What is the cost for your data offering?
Please contact FTSE Russell for information on licensing our sustainable investment data and indexes.
EMEA: + 44 (0) 20 7866 1810
North America: +1 866 551 0617
Hong Kong: + 852 2164 3333
Tokyo: + 81 3 3581 2764
Sydney: +61 (0)2 8823 3521
What are the key attributes that differentiates the data you offer?
FTSE Russell’s ESG Ratings data has a number of unique benefits, including:
- Flexibility and customization
The data model is designed for customization by the user to enable the data to be ‘sliced and diced’ to meet each user’s needs.
The ESG Ratings can be accessed through the online data model and include over 4,700 securities in 47 Developed and Emerging markets, comprising the constituents of the FTSE All-World Index, FTSE All-Share Index and Russell 1000® Index.
- Emphasis on materiality
Ratings are calculated using an Exposure-weighted average, meaning that the most material ESG issues are given the most weight when determining a company’s scores.
- Precise rules and focus on data
The ESG Ratings and data model has clearly defined rules for assessing and rating companies. The output is a data tool that is quantitative, rather than qualitative company research reports.
- Objective and strong governance
The ESG data model is overseen by an independent external committee comprising experts from the investment community, business, NGOs, unions and academia.
- Sustainable Development Goals aligned
The ESG Ratings support alignment with the UN Sustainable Development Goals (SDGs). All 17 SDGs are reflected in the 14 Themes under the ESG framework.
@FTSERussell data and analytics to take ESG from niche to norm. Our ESG Ratings covers thousands of companies across developed and emerging markets globally. Experienced provider of investment data models, ratings, analytics and indexes. #SustainableInvestmentindexes