FTSE Russell Insights

Solving the sustainable investment challenge

Kingsley Ford

Global Head of Index Investments Group

The sustainability imperative is adding an extra layer of complexity to investment management. Investors are increasingly turning to tailored solutions.

The rise of sustainable investment is making life more complicated for investors and investment managers. While they continue to face the constant challenge of balancing risk and return, they must now also manage the additional layer of complexity introduced by the imperative to take sustainability considerations into account.

This is the fundamental problem that most investors come to us with as they look for sustainable investment solutions for their clients or beneficiaries. How can they balance sustainability objectives with investment performance goals?

This question is only getting more urgent as the mood in global markets turns darker, because the drivers that have led to a boom in sustainable investments in recent years remain in place. Whether as a result of investor preference, regulatory requirements, corporate commitments, or from the growing realisation that climate and other environmental, social and governance (ESG) factors can be important determinants of investment performance, demand for sustainable investment is only headed in one direction.

The good news for clients is that there is a growing suite of sustainable investment solutions that balance delivering sustainability outcomes with the risk and return characteristics of standard benchmarks. Indices can be designed that resemble standard benchmarks, but tilt towards companies with better sustainability performance or prospects. Strategies are available that provide exposure to the burgeoning green economy so that capital can be directed towards those industrial giants who are most effectively pivoting towards the low-carbon transition, rather than simply excluding all fossil-fuel-related companies.

But no two investors are the same. For these solutions to work well, as much attention needs to be paid to each client’s sustainable investment objectives as to their risk-return goals. Whilst we provide a wide range of off-the-shelf, standard indices, often a tailored index is more suitable for meeting a specific client’s requirements.

One fast-moving trend we have seen is clients wanting to apply similar climate transition solutions across asset classes. As such, we have worked with clients to design indices for the launch of ETFs and funds across equities (FTSE TPI Climate Transition Indices), fixed income (FTSE Climate Risk Adjusted Government Bonds), real estate (FTSE EPRA Nareit Green) and infrastructure (FTSE Core Infrastructure TPI) asset classes. These indices aim to reduce the risks associated with climate change, whilst also targeting the growth segments set to benefit from the transition to a low carbon economy. These indices are either used as standard or are tailored to meet the local market ecosystem trends and investor requirements as bespoke solutions.

For asset owner investors, shifting large parts of their portfolios into sustainable investments can be a multi-year process, requiring exhaustive analysis of the options available and the likely impact on investment performance. They are often highly sensitive to the degree to which a sustainable investment strategy would introduce tracking error compared with a mainstream market benchmark. Here, it tends to be a process of finding a balance between sustainability impact and the degree of tracking error they are comfortable with.

For example, New York State Common Retirement Fund sought an index-tracking fund that provided exposure to US corporations that are aligning their businesses with the climate transition, while also reflecting the performance of US large-caps. It chose a mandate based on the Russell 1000 TPI Climate Transition Index, which varies the weights of constituents based on climate risk and opportunities.

Some asset owners, meanwhile, are looking for entirely bespoke solutions. We worked with Dutch pension fund Detailhandel to develop a customised index aligned with companies that were delivering against four of the 17 UN Sustainable Development Goals, while also retaining the characteristics of a passively managed broad market equity portfolio. This same approach has then been extended into their fixed income portfolio.

Similarly, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, was looking to better integrate ESG considerations into its flagship equity fund. We worked with GPIF to design the FTSE Blossom Japan Index which, while closely tracking its traditional market capitalisation-weighted benchmark, is weighted towards companies with higher ESG ratings and which deliver impact in line with the UN Sustainable Development Goals. The GPIF has allocated $6.2 billion to a new passive fund tracking the index.

But it’s not just providing solutions – it’s also about educating investors and developing the ecosystem. For all that sustainable investment is fast becoming mainstream, it remains a novel concept for many investors. We work with ETF providers and fund managers to help them educate their investor base on sustainable investment index solutions that underpin their investible products, providing explainers and research material to help their clients understand the concepts at play.

We understand that critical to the value of an index solution is the data that underpins it. Therefore, we have worked with the Church of England Pensions Board, the London School of Economics and the UK’s Environment Agency Pension Fund to develop the Transition Pathway Initiative (TPI), which is supported by 131 asset owners, managers and services providers representing over $50 trillion of assets. We provide the data to enable the TPI to assess the progress of almost 600 of the world’s largest emitting companies towards the low-carbon economy, taking a forward-looking approach to management quality and carbon performance. This is helping a wide range of investors to better understand the climate exposure of their investments and underpins our FTSE TPI Climate Transition Indices.

Ultimately, we recognise the need to help educate the wider market if the financial sector is to play its part in the transition to a more sustainable economy. As part of the London Stock Exchange Group, we share its critical role in enabling the green economy, bringing rigour, transparency and high standards of governance to our work on sustainable finance and investment.

We understand the questions our clients are grappling with as sustainable investing evolves from optional extra to must-have. By listening to their needs and adapting our solutions in response, we believe we can help provide some of the answers.

Read more about

Stay updated

Subscribe to an email recap from:


© 2024 London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) FTSE (Beijing) Consulting Limited (“WOFE”) (7) Refinitiv Benchmark Services (UK) Limited (“RBSL”), (8) Refinitiv Limited (“RL”) and (9) Beyond Ratings S.A.S. (“BR”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL, and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv” , “Beyond Ratings®”, “WMR™” , “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, WOFE, RBSL, RL or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator. Refinitiv Benchmark Services (UK) Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.

No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.

This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.