A short history of
Sustainable Investment
innovation
Driving better global standards in sustainable investment
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FTSE Russell product development and launches
Global, regional, country policies and regulatory changes
Market statistics and trends
2006
Enhanced the FTSE4Good Index criteria - environmental management criteria rolled out Joined the UK Sustainable Investment and Finance Association (UKSIF) as a member
Enhanced the FTSE4Good Index criteria - human rights criteria developed with Amnesty International and market consultation
2001
2003
2002
Launched the FTSE4Good Japan Index FTSE and ISS launch the first ever Corporate Governance index, however following a lack of market usage and challenges over developing a single global methodology it is withdrawn two years later
2004
Joined the Principles for Responsible Investment (PRI) as a founding signatory Joined the US SIF: The US Forum for Sustainable and Responsible Investment as a member Enhanced the FTSE4Good Index Criteria - countering bribery research included
Enhanced FTSE4Good Index criteria - supply chain labor standards criteria developed
2005
Introduction of the United Nations-backed Principles for Responsible Investment (PRI). FTSE Russell a founding signatory
YEARS
Launched the FTSE4Good Global Index Launched the FTSE4Good UK, US, and European indexes
When the FTSE4Good Index Series launched in 2001 it was regarded by many as a fad. Environmental and social issues were regarded as niche “ethical” concepts that were irrelevant, distracting, or even return-compromising by almost all investment professionals. The trend toward sustainable investment approaches was first seen through the growth in the number of institutions and geographies making commitments and joining initiatives, initially the Sustainable Investment Forum (including UKSIF, EuroSIF, US SIF) and then later the formation of the UN-backed Principles for Responsible Investment (PRI).
Vanguard adopts the FTSE4Good US Select Index, tracked by its Social Index Fund. This becomes one of the largest SRI mutual funds in the world
Early years
SUSTAINABLE INVESTMENT AUM $TRILLION
$2.6 T
$3.6 T
Source for 2002 - 2010: These figures represent global assets under management that incorporate ESG and are sourced from the EuroSIF 2003, 2006, 2008 and 2010 SRI studies using USD conversion rates as of 22 Nov 2010 Source for 2012 - 2018: These figures represent global assets under management that incorporate ESG and are sourced from the Global Sustainable Investment Alliance's Global Sustainable Investment Review, 2012, 2014, 2016 and 2018
The launch of the FTSE4Good follows regulatory changes made in 2000, where UK pension funds take account of Social Ethical or Environmental (SSE) issues in their Statement of Investment Principles (SIP)
2012
2007
2008
2009
2010
2011
Enhanced the FTSE4Good criteria - selection criteria for uranium mining introduced (replaced an exclusion) Enhanced the FTSE4Good Index criteria - new climate change theme (developed with CDP, WWF & the Climate Group and market consultation) Celebrated 5 year anniversary of the FTSE4Good with David Miliband, UK Government Secretary of State for the Environment; Stuart Rose, CEO of M&S; and Digby Jones, former CEO of the CBI Launched the FTSE4Good Environmental Leaders Europe 40 Index First ever Green Bond (issued by the EIB as the Climate Awareness Bond) is created as a Structured Product giving returns linked to the FTSE4Good Environmental Leaders Euope 40 Index. It raises over 600 million Euros
Launched the FTSE Environmental Markets Indexes in partnership with Impax Asset Management Set up the FTSE Environmental Markets Committee. First Chairman was Winston Hickox Joined the Japan Sustainable Investment Forum (JSIF) as a member Launched the FTSE4Good IBEX Index in partnership with the Madrid Stock Exchange (BME) Launched the first green industrial taxonomy; the FTSE Environmental Markets Classification System
Launched the FTSE4Good Australia 30 Index Joined the Responsible Investment Association Australasia (RIAA) as a member
The first meeting of the Sustainable Stock Exchanges (SSE) was opened by UN Secretary-General Ban Ki-Moon in New York City
Enhanced the FTSE4Good criteria - selection criteria for nuclear power introduced (replaced an exclusion)
Launched a carbon adjusted index adopted by BT Pension Fund, together with Trucost and LGIM. Also partnered with CDP and ENDSCarbon to launch Carbon Strategy Indexes Introduced responsible marketing criteria for infant formula and foods Sir Mark Moody-Stuart becomes Chairman of the FTSE4Good Committee
Enhanced the FTSE4Good Criteria - supply chain and countering bribery extension
Global Sustainable Investment Alliance (GSIA) starts reporting global Sustainable Investment assets The first Stewardship Code was developed in the UK (Financial Reporting Council) The UK introduces the first mandatory carbon reporting requirements through amendments to the Companies Act, which came into force the following year in 2013
The SIFs combine their work measuring "SRI assets". Global Sustainable Investment Alliance (GSIA) starts tracking assets with an ESG approach via a bi-annual report. More than US $13 trillion assets since 2012
TRILLION
+US$13
Next came, the introduction of the first country stewardship code in the UK, that encouraged investors to deepen their interaction and engagement with investee companies on strategic issues. The UK Stewardship Code was first unveiled by the Financial Reporting Council and other Stewardship Codes have since been adopted in a variety of other countries including South Africa, Switzerland, Italy, Holland, Japan and Malaysia, influenced by the UK version. For many years there was a growth in commitments and policies, but little change in investment practices and actual asset allocation. This period also saw the investment industry start to become aware of climate risks. FTSE4Good introduced climate criteria, carbon adjusted (tilted) indexes were launched, the first green industry classification was developed and the first green bond was issued.
Climate change & investor stewardship
$6.8 T
$10.1 T
$13.6 T
2014
Stewardship code implemented in Japan Stewardship code implemented in Malaysia
The Global Sustainable Investment Alliance (GSIA) has identified more than US$18 trillion of assets that have some form of ESG approach applied to them
2015
Launched the FTSE4Good Bursa Malaysia Index FTSE Russell/ LSEG chairs the development of the UN Sustainable Stock Exchange Model ESG Reporting Guidance for exchanges globally. Launched at London Stock Exchange
2018
2013
2016
2017
Launched the FTSE ex Fossil Fuels Indexes Launched the new ESG data model which doubled the number of ESG themes and focused on quantitative and sector measures London Stock Exchange Group (LSEG) joins the UN Sustainable Stock Exchanges Initiative (SSEI)
FTSE Russell/LSEG represented on EU High-level Expert Group on Sustainable Finance Launched the FTSE All-World ex CW Climate Balanced Factor Index, first smart sustainability index, which was adopted by Legal & General’s Future World Fund for the HSBC Bank UK Pension Scheme defined contribution default equity fund Launched the Green Revenues data model and FTSE Green Revenues Indexes Launched the FTSE JSE Responsible Investment indexes
The United Nations Climate Change Conference, COP 21, held in Paris, was where world leaders negotiated the Paris Agreement, a global agreement on the reduction of climate change Article 173 of The French Energy Transition for Green Growth Law (or Energy Transition Law), marks a turning point in carbon reporting The establishment of the Task Force on Climate-related Financial Disclosures (TCFD) The 2015 UK Law Commission’s Report on the fiduciary duties of investment intermediaries found that consideration of ESG factors by pension trustees was entirely consistent with their fiduciary duty to beneficiaries A revision to the Employee Retirement Income Security Act (ERISA), which sets out the minimum standards for private sector pension and health schemes in the U.S. changed the law to consider that ESG integration is not at odds with a pension scheme’s fiduciary duty
The 17 Sustainable Development Goals (SDGs) of the 2030 Agenda for Sustainable Development officially came into force China launched Guidelines on Establishing the Green Financial System The EU High-level Expert Group on Sustainable Finance launches Stewardship code implemented in Hong Kong Stewardship code implemented in South Korea Stewardship code implemented in Taiwan
The Global Sustainable Investment Alliance (GSIA) has identified more than US$22 trillion of assets that have some form of ESG approach applied to them, with an annual growth rate of c.20% since the GSIA started keeping track in 2012
Launched the LSEG ESG guidance for issuers FTSE Russell first asked global asset owners ESG integration questions in its annual Smart Beta survey Launched the FTSE Blossom Japan Index, which was selected for an important passive mandate by the Japanese Government Pension Investment Fund (GPIF) Launched the FTSE Global Climate Index Series Launched the FTSE ESG Index Series Launched the FTSE4Good TIP Taiwan ESG Index FTSE ESG Ratings climate Theme enhanced to reflect TCFD
The Transition Pathway Initiative was launched using FTSE Russell's ESG data The Financial Stability Board releases its Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) report The EU Pensions Directive ("IORP II") was finalized and member states given until January 2019 to implement Stewardship code implemented in Australia Stewardship code in implemented in India Stewardship code in implemented in Singapore
60%
20%
60% of asset owners in Europe are considering incorporating ESG screens in their smart beta allocations compared to 20% in North America.
Of those larger asset owners (over $10tn) who are using or are interested in smart beta, 57% anticipate applying ESG considerations to their smart beta strategies. The main rationale being to avoid long term risks
57%
Europe
North America
Joined the Responsible Investment Association Canada (RIA) as a member Launched the FTSE Russell Stewardship, Transition and Engagement Program (STEP Change) including the Corporate Peer Comparison tool Launched the FTSE Global Choice Index Series Launched the FTSE Women on Boards Leadership Index Series Enhanced the ESG Ratings - water criteria included Launched the FTSE Russell Green Economy annual trends report Launched the FTSE EPRA Nareit Green Indexes Announced a new strategic partnership with Sustainalytics that complements existing products to provide the market with choice
PRI mandatory reporting for service providers The EU High-level Expert Group on Sustainable Finance released its EC Action Plan on Sustainable Finance, setting out its strategy for a financial system that supports the EU’s climate and sustainable development agenda European Commission names members of Technical Expert Group on Sustainable Finance, including an LSEG representative Sustainability Accounting Standards Board’s (SASB) codified reporting standards launched with a Market Open at the London Stock Exchange Canada: Federal government appointed an Expert Panel on Sustainable Finance to consult the financial community and draft a report outlining the opportunities and challenges related to sustainable finance and climate-related risk disclosure in Canada
40%
Source: FTSE Russell's smart beta: 2018 global survey findings from asset owners
38%
Source: FTSE Russell’s annual trends report, “Investing in the global green economy: busting common myths”
US$4
As of April 2018, the PRI had almost 2,000 signatories with combined assets of more than US$80 trillion. These figures are significant and have grown rapidly each year. Since 2013 the PRI has seen its signatories grow by 40% and its associated assets by almost 60%
The green economy represents 6% of the market capitalization of global listed companies, approximately US$4 trillion. This represents a significant investment opportunity, approximately the same size as the fossil fuel sector
Globally, over half of asset owners are currently implementing or evaluating ESG considerations in their investment strategy. Among those who are using and/or evaluating smart beta strategies, 38% anticipate applying ESG considerations to their smart beta strategy of choice
Nearly two decades after the FTSE4Good Index Series was launched and the landscape has changed beyond recognition, with financial institutions around the world—including pension funds, insurance companies, asset managers and banks—now incorporating sustainable investment approaches into their investment philosophy and processes. From 2015, ESG integration into passive strategies (index design not only engagement and voting) takes off too. However, the step change, which has been evident in the last two or three years, has been in the actions being taken: re-allocating assets and using sustainability parameters in an integrated manner deep within the investment process.
Introduction of the PRI's mandatory reporting framework In the UK, under the Amendments to the Companies Act 2006, a number of ESG reporting requirements were introduced, including those for companies listed on the main market of the London Stock Exchange to report their greenhouse gas emissions on a comply or explain basis. This requirement has contributed to UK listed companies having one of the highest levels of carbon emissions disclosure globally
+US$18
+US$22
Source: FTSE Russell smart beta survey 2017
ESG integration becomes the norm
$18.3 T
$22.9 T
Jack Ehnes, CEO of CalSTRS, becomes Chairman of the FTSE Environmental Markets Committee
$30.7 T
2019
Canada’s Expert Panel on Sustainable Finance launched a series of recommendations for the federal government to align Canada’s financial system with a sustainable future The EU TEG published its first technical report on the Taxonomy, which explains its conceptual approach, the underlying methodology, technical screening criteria for climate change mitigation activities (environmental objective 1), use cases and expected economic impacts The European Council and the European Parliament reached political agreement on the EU Taxonomy Regulation, meaning that its provisions will come into force at the end of December 2021 The EU TEG developed recommendations for minimum requirements for benchmarks that are aligned with the objectives of the Paris Agreement and address the risk of greenwashing (the Paris-Aligned Benchmark and Climate Transition Benchmark) The Global Reporting Initiative (GRI) expanded to Singapore to expand ESG data reporting to Asia SASB completes the 77 industry standards and launches these at the London Stock Exchange
Globally, nearly six in 10 asset owners are implementing or evaluating ESG considerations in their investment strategy—77% of European asset owners expressed interest in applying ESG considerations to smart beta, up from 55% the previous year Reported that over 560 ESG consideration funds in the US with $933 billion in assets under management at the end of 2019
2021
2020
Expanded the climate risk-adjusted government bond index series with the FTSE Climate EGBI Church of England Pensions Board selected FTSE TPI Climate Transition Index, next generation climate index, with Transition Pathway Initiative's corporate engagement scores incorporated Beyond Ratings' climate risk data for sovereign debt markets is added to the Yield Book analytics platform Launched the FTSE4Good Indonesia Index Launched the FTSE ESG Low Carbon Select Indexes, using the innovative FTSE Target Exposure methodology, which was selected for HSBC GAM’s range of low carbon ESG ETFs BlackRock selected FTSE Advanced Climate Risk-Adjusted EMU Index as benchmark for the first climate risk-adjusted government bond ETF in the market Launched enhanced Green Revenues 2.0 Data Model, covering 10 sectors, 64 sub-sectors and 133 micro-sectors. The updated Green Revenues Classification System features high overlap with the EU Taxonomy for sustainable activities Japanese small-cap stocks were added to the FTSE Blossom Japan Index as the underlying benchmark switched to FTSE All Cap Japan Index Together with Church of England Pensions Board and the Transition Pathway Initiative, The FTSE TPI Climate Transition Index won ‘ESG Incorporation Initiative of the Year,’ in the prestigious 2020 Principles for Responsible Investment (PRI) Awards
Sustainable investment accelerates and deepens globally and across asset classes especially fixed income. Much consolidation as smaller specialist providers are acquired. The COVID-19 pandemic, despite its manifold societal and economic impacts accelerates the move towards ESG. Amidst growing concerns on climate change, biodiversity, and equality the new decade brings intensifying urgency among investors to critically act about how they invest.
Sustainable & Climate Investing reaches a tipping point
GRI launches its Tax Transparency Criteria at the London Stock Exchange The five leading ESG reporting standard organizations — CDP, CDSB, GRI, IIRC and SASB — announced a shared vision for a comprehensive corporate reporting system and their commitment to collaborate to achieve it The UK proposes plan to (1) phase in mandatory disclosure on climate risk based on TCFD for companies, (2) issue first UK sovereign green bond in 2021, (3) to join the International Platform for Sustainable Finance alongside the EU and China and (4) develop a UK taxonomy that will be aligned with the EU The US Commodity Futures Trading Commission’s Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee (MRAC) released a report that presents 53 recommendations on managing climate risk in the U.S. financial system The US formally exits the Paris Climate Agreement under the Trump Administration. Then US President-elect Biden announced that the government will re-join on his first day in office The Board of IOSCO publishes a report on Sustainable Finance and the Role of Securities Regulators. IOSCO and IFRS conducts a consultation whether IFRS Foundation should play a role in setting global sustainability reporting standards New Zealand’s Ministry for the Environment announced that the government plans to make climate-related financial disclosures mandatory for certain publicly listed companies and large financial institutions Australian Sustainable Finance Initiative released its Australian Sustainable Finance Roadmap Canada's federal government publicly committed $7.3 million over three years to create a public-private Sustainable Finance Action Council (SFAC), to be launched in early 2021
More than 40% increase in the number of indexes measuring environmental, social and governance criteria in the past year Approximately 58% of asset owners globally anticipate applying sustainability considerations to smart beta strategies, up from 44% in 2019. Among those who anticipate applying sustainability to their smart beta strategy, Climate risk/Carbon tops the list of sustainability themes at 64% The green economy is worth approximately $4 trillion, representing 6% of the market capitalization of all global listed companies Issuance data showed an increase of over 350% in social bonds in 2020 to $43.8billon, compared to $17.2billion at the same time in 2019 Canadian trends show that there is CA$3.2 trillion in Responsible Investment AUM, which represents 62% of Canadian AUM COVID-19 appeared to accelerate ESG and Sustainability trends during H1 2020 with net inflows to ESG funds whilst other funds experienced out-flows, according to Lipper and Morningstar. Social issues also come to the fore with the "Black Lives Matter" and "Build Back Better" movements
Source: FTSE Russell's Smart Beta 2019 Global Survey Findings from Asset Owners
Source: Morningstar's Sustainable Funds US Landscape Report
Source: Bloomberg NEF
Source: FTSE Russell Green Revenues data
Source: FTSE Russell's Smart Sustainability 2020 Global Survey Findings from Asset Owners
Source: Index Industry Association Benchmark Survey 2020
Source: RIA Canada: 2020 Canadian Responsible Investment Trends Report
Launched the FTSE Chinese (Onshore CNY) Green Bond Index Launched the FTSE UK 100 ESG Select Index, which was selected by HSBC as the underlying benchmark for new ESG-related structured products Pensioenfonds Detailhandel selected FTSE Russell's custom SDG index for passive allocation that aligns with the UN Sustainable Development Goals Launched the FTSE4Good BIVA Index, FTSE4Good North America Index and FTSE4Good Developed Asia Pacific Index Increased the threshold levels for the FTSE4Good Index Series to 3.3 for Developed Markets and 2.9 for Emerging Markets Launched additional green real estate indexes: the FTSE EPRA Nareit Developed Europe ex UK Green Index and FTSE EPRA Nareit Developed Green Focus Index LSEG acquired Beyond Ratings, highly regarded provider of ESG data for fixed income Launched first climate risk government bond index, FTSE Climate Risk-Adjusted World Government Bond Index (FTSE Climate WGBI) FTSE4Good TIP Taiwan ESG Index selected for first ESG ETF listed on TWSE LSEG launched Green Economy Mark utilizing FTSE Russell's Green Revenues data. The Mark recognizes equity issues on LSE with green revenues of 50% of more LSEG launched Sustainable Bond Market Expanded ESG Ratings coverage in APAC to include Australian small caps, Japanese small caps and China A securities
Sustainable Investment practices and standards continue to evolve
Institutional investors now have better data and more tools to integrate ESG into their investments than ever before. Looking ahead, the policymakers, regulators and research providers will continue promoting transparency and disclosure in the portfolios of asset owners and their investment managers worldwide.
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