Paul: Welcome to Index Ideas, your fortnightly look at how FTSE Russell builds its indices and why. I'm Paul Amery, your podcast host. In this podcast, we explore how FTSE Russell indices can help you solve real-world investment challenges, manage risk and capture new opportunities. As a reminder to listeners and viewers, you cannot invest in an index. And so the concepts that we discuss in this podcast are not investment advice. Our index ideas are for informational and educational purposes only.
Paul: In this episode, I'm joined by Stephanie Maier, who is global head of sustainable at FTSE Russell.
Stephanie, welcome back to Index Ideas.
Stephanie: Thank you, Paul.
Paul: Stephanie, we've recently released the Ninth FTSE Russell Sustainable Investment Asset Owners Survey. What insights have these surveys given us into the role of sustainability amongst institutional investors and investment practices?
Stephanie: Thanks Paul, and great to be here. So, as long-term owners of capital, asset owners are key actors within the investment markets. These surveys, which as you say, we've been doing for almost ten years now, help tell us what asset owners are thinking and doing and also how they're doing it and why they're doing it. It provides really good insight in terms of those priority issues for this key cohort and provides, I think, well, we hope a very helpful snapshot in terms of that thinking and in particular, how the market is evolving over the years.
Paul: Thanks, Stephanie. So what does this latest survey, the ninth survey, say about adoption levels for sustainable investment?
Stephanie: So essentially, it's telling us that the integration of the sustainable considerations amongst asset owners is becoming both broader and deeper. So in terms of that incorporation, we now have 84% of asset owners globally stating that those considerations are being integrated. So it was last that high in 2022. So I think really a return to the importance of embedding these factors into investment decision making.
Paul: One thing that caught my eye, Stephanie, when looking through the survey results, was that rates of adoption in North America have caught up with those in Europe, and also those in APAC have also converged with those in Europe. I know that traditionally North America had been a bit of a laggard when it came to adopting sustainable investment. Why have those levels evened out across global regions?
Stephanie: Well, if we look back at some of the major events of the last 12 months, you'll see that things like the energy shock, caused by the conflict in the Middle East, things like the high temperatures that we've seen around the world have really focussed and brought into sharp relief some of these sustainability issues and how they impact on the investment landscape. And I think we've seen that again globally, whether you're in Europe, in Asia, in North America. And part of that reflection earlier that essentially we're seeing these considerations being more widely adopted and further integrated into mainstream investment processes.
Paul: How deeply are asset owners applying sustainability factors across their portfolios?
Stephanie: So one of the questions that we ask about is really that breadth of assets that these practices are being applied to. That number is now up to over half, so 55% of assets, up from around 40%, 41% last year. There's now 10% of respondents that say they apply it to 100% of their assets. So it's becoming more and more part of those standard practices.
Paul: And what are survey respondents telling us about their top sustainability priorities? What are the most commonly cited priorities?
Stephanie: Yeah. So this is always an interesting one, both seeing where the focus is and also looking at some of the more emerging issues as well. It's perhaps no surprise to note that climate continues to be a key sustainability priority. So over 80%, 86% of asset owners citing it as sort of a top investment risk. If you look at both climate transition and climate physical risks, again, a really key priority for asset owners. This year however, we did also see that broader governance, tax, shareholder rights issues rose to the top of the priority issues, with around a third citing it as their priority issue.
Paul: So why do you think, Stephanie, that particular topic, governance, tax and shareholder rights has become more prominent in the survey results?
Stephanie: Yeah, so governance has always been a key part of the E, S, and G, the environmental, social and governance considerations, when we think about the broader sustainable investment approaches this year, we've seen some new IPOs, we've seen a lot more discussion around shareholder rights. We've also seen maybe a different pattern around the AGM voting season, in terms of how those shareholder rights translate into the voice of the investor to the company. So I think some of that broader governance concerns are related to some of those specific events. But also broader market concerns. If you think about the broader geopolitical risk, volatility, a lot of challenges for boards to be dealing with. Under those circumstances, you really want to ensure that the board is well structured, hence why we think governance is seeing a bit of a peak from previous years.
Paul: Thanks Stephanie. You mentioned earlier that it's been a very hot summer in the northern hemisphere, we've had a record-breaking drought in Europe. What are survey respondents saying specifically about climate risk?
Stephanie: So climate risk, so physical climate risk and adaptation risk are a priority issue for around a quarter of asset owners. I think certainly again, when we think about climate risk more broadly, transition risk remains really key and highlighted earlier some of those challenges around energy transition and resilience security highlighted by the impact again, particularly in Asia, actually felt as a consequence of the conflict and the essentially obstruction of the Straits of Hormuz. We're also seeing a lot more focus on the physical risk because of the impacts and the extreme, whether it's drought, flooding, we've seen really come through in terms of the priorities that we're seeing asset owners highlight.
Paul: And when it comes to high-carbon assets, what do the survey results say about asset owners and investment managers' intention either to divest or to engage more? What are people saying?
Stephanie: So I mean, engagement continues to be a key tool for asset owners. Mentioned earlier, long-term stewards of capital, in many cases universal asset owners are really concerned with using that voice in terms of influencing both company-specific and broader systemic risks as well. But what we're seeing actually is some of that focus on engagement reducing and in favour of a divestment approach for some of those high-carbon assets. Now that may be as a result of what may be sort of multi-year engagement activity. But I think important that we're seeing some of that action and consequence of perhaps unsuccessful engagement coming through in some of the tools that asset owners are using.
Paul: And to what extent are survey respondents concerned that financial performance from sustainable investment may represent a barrier to broader adoption?
Stephanie: So, all sustainable investment strategies are first and foremost, investment strategies. Performance matters, how it performs over different market conditions is key, as well as meeting the sustainable outcomes as well. So we've seen a sort of similar pattern evolving over recent years. So, in terms of being seen as a barrier, that's actually toning down. And increasingly asset owners are saying that their approach to sustainable investment is really about focusing on better portfolio returns. So we're seeing some of that risk-return focus maybe shifting. But obviously key for any strategy that performance is part of that design.
Paul: Thanks, Stephanie. Obviously, near-record levels of investment and interest in sustainable investment. When it comes to potential barriers for further adoption, some survey respondents talked about corporate reporting and disclosures being a challenge and potentially a barrier to further adoption. What could be done to improve those reporting standards?
Stephanie: Yeah. So I mean, we've seen, I think if you take a much longer time frame and certainly over the last ten years or so, we've seen corporate reporting and the quality, the comparability and breadth of sustainable data improve markedly. One of the reasons for this has been regulation. One reason has also been the advocacy for that reporting and disclosure by investors as well. I think the reason for seeing that now increase in terms of being cited as a barrier is some of the changes that we've seen in the regulatory regimes around the scope of some of the mandatory reporting requirements. So I think the challenge or the concern there being voiced is one that we're going to see that sort of reduced reporting being a barrier going forward. I mean, I would say things like ISSB have seen much stronger adoption and certainly, my view is that over the long term, we are going to continue to see an improvement in the quality and materiality of corporate reporting around ESG factors.
Paul: And is there anything specific that FTSE Russell is doing in this regard? We obviously collect a lot of sustainability data and analysis.
Stephanie: So one of the great bits about being part of the broader LSEG family is, as you say, we have a lot of data collected within our data and analytics business and also data that we work with partners like the Transition Pathway Initiative to make accessible to our broader clients and importantly, also use within our index solutions as well. As I said, the data quality continues to improve but is an area that will continue to be exceptionally important. In particular for index-based strategies as well.
Paul: We asked our survey respondents to what extent they use active or passive strategies for their sustainable investment. What do the results tell us?
Stephanie: Well, sitting within an index provider, it does seem that asset owners are increasingly looking at index-based solutions for their investment strategies. There are a number of reasons for that in terms of transparency. I'd say also actually that a lot of the data and the outcomes that can be achieved through index methodology are becoming a lot more sophisticated as well and still continue to be a really strong option for public listed markets.
Paul: Thank you, Stephanie. Any parting thoughts, any topics that are top of mind when you're talking to asset owners in recent meetings or over the coming months?
Stephanie: Well, I'd say it continues to be for all investors, including sustainable investors, an interesting time in terms of market volatility. I will say that what we're hearing is certainly a continued focus on better understanding both the risks and opportunities from climate transition. And as we talked about earlier climate risk as well. We're also seeing, I think a much more focussed level of, understanding around all of the different approaches, whether that's looking at various screens that are applied and how we look at that. We published a paper earlier this year around climate screens and the differences in terms of how they can be applied. But I think we continue to focus on the index solutions, the data and the analytics that help our asset owners make their investment decisions.
Paul: Well, thank you, Stephanie, for joining me to talk about The Ninth Annual Sustainable Investment Survey conducted by FTSE Russell. And that's available on the FTSE Russell website.
Paul: That's it for this episode of Index Ideas. If you've enjoyed the podcast, please like us or share us on your podcast app of choice. If you'd like to get in touch with the show, you can do so at the email address
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