Asset managers seeking to prioritise environmental, social and governance (ESG) concerns of the investor can sometimes struggle to decipher the sustainable investment space. Adding to uncertainty is a plethora of ways to measure corporate ESG initiatives. For many asset managers, understanding the details of ESG rankings and how products are structured is vital to evaluating risk/return profiles.
Our new FTSE UK ESG Risk-Adjusted Index Series can help investors integrate ESG considerations into portfolios without considerably altering the risk/return profiles associated with its indices. Variance between the underlying starting weight and the ESG index is limited, allowing the ESG index to closely track the original. This measured approach allows equity investors to improve portfolio sustainability yet minimise risk and maintain exposure to large-cap UK equities.
Key takeaways:
- Understanding the details of ESG rankings and how products are structured is vital to evaluating risk/return profiles
- This new index series helps investors integrate ESG considerations into portfolios without considerably altering the risk/return profiles associated with its indices
- FTSE Russell licensed the FTSE UK ESG Risk-Adjusted Index Series to ICE for the purpose of creating ESG derivatives contracts
- In 2023, Intercontinental Exchange (ICE) launched futures based on the FTSE 100 ESG Risk-Adjusted Index and the FTSE All Share ESG Risk-Adjusted Index
Points of differentiation:
- While the FTSE UK ESG Risk-Adjusted Index Series doesn’t eliminate exposure to fossil fuels, it reduces them by 50% compared with underlying benchmarks. The indices also offer a 5% ESG score improvement and 50% reduction in carbon emissions intensity via semi-annual rebalances
- The aim of the series is to reduce carbon emissions and reserves exposure, while improving the index level ESG performance compared to the benchmark
What does the research mean for our clients?
- Fulfils client needs whilst also providing a straightforward ESG adjusted version of the flagship UK equity benchmarks
- With investor demand rising for sustainability-oriented financial products, understanding the details of the index construction and methodology can help asset managers meet their ESG and return goals
- Investors can tap into the substantial liquidity of ICE’s FTSE derivatives complex and benefit from the efficiencies of central clearing
