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
- 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.
Where and how do you source your data?
FTSE Russell's Green Revenues data relies upon publicly disclosed information. Our primary sources of data are reports and other disclosures from companies. However, we will also use data from other sources such as governments and NGOs etc. All companies are then analyzed and classified using the FTSE Green Revenues Classification System (GRCS).
A Green Revenues Factor is calculated for each company between zero and 100% of revenues. This unique factor represents the total of green revenues generated by the company from any of the 60 subsectors in any single fiscal year as a ratio of the company’s overall revenues. Factors can be mapped over time; calculated across any of the 60 green subsectors or 8 broad green sectors; and aggregated by company size, traditional industrial classifications, country, region or globally.
The Green Revenues data model is overseen by an independent external committee comprising experts from the investment community, business, NGOs, unions and academia. Companies are researched and updated annually.
Who are the data users?
FTSE Russell’s Green Revenues data is used by asset managers, asset owners, investment consultants, and academic institutions.
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 Green Revenues 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.
Green Revenues data can be accessed through the online data model and measures the revenue exposure of more than 14,700 public companies engaged in the transition to the green economy across 48 Developed and Emerging markets.
- Precise rules and focus on data
The Green Revenues 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 FTSE Green Revenues Classification System (GRCS) is governed by the FTSE Environmental Markets Advisory Committee which is instrumental in ensuring that the classification system is in accordance with best practice and is relevant to market needs.
- Sustainable Development Goals aligned
The Green Revenues data model supports alignment with the UN Sustainable Development Goals (SDGs).
- Transparent indexes
The FTSE Green Revenues Index Series is designed to obtain increased exposure to companies engaged in the transition to a green economy, based on FTSE’s Green Revenues data model.
Is the #greeneconomy at a tipping point as it matches fossil fuels as a proportion of global equity markets? Read the report from @FTSERussell today