Sustainable Growth Podcast

Is passive now massive? Adapting sustainable investment approaches

Episode 12, Season 7

How have sustainable investment approaches evolved with the growing popularity of passive investing? In this episode, we talk to Aled Jones, Head of Sustainable Investment Solutions at FTSE Russell, about the range of sustainability metrics seen in different indexes and how they are evolving to meet ever-changing investor needs. From assessing company alignment to the Paris Agreement to a broader ESG approach aiming to reduce ESG risk exposure, Aled explains how these different approaches meet different investor priorities and why these priorities have shifted over the years.

Host: Jane Goodland, Global Head of Sustainability at LSEG


  • Jane Goodland: Welcome to the LSEG Sustainable Growth Podcast. I'm your host, Jane Goodland. And with me today is Aled Jones, who is a long-time friend and colleague and but also happens to be the head of sustainable investment indexes at FTSE Russell. So, we've seen huge growth in passive investing and ESG. So, we thought it would be interesting to talk about what sustainable investment indices are, how they've evolved over time, and take a look at some of the more complex solutions that we're seeing emerge. So, without further ado, let's get into it.

    Jane Goodland: Well, hello, Aled Jones. What a delight to be able to speak to you today. So, we go back a long, long way.

    Aled Jones: We do.

    Jane Goodland: So, I know kind of pretty much all about your long career, but why don't you just give us a quick potted history so we can share with the lovely listeners what you've been up to over the last 20 plus years.

    Aled Jones: That would be my pleasure, Jane, and lovely to be here. So, I guess I sort of fall into these days, the veteran category in the ESG world. I'm not going to extend that to you, but you can take a view on whether that also applies.

    Jane Goodland: No, I really am.

    Aled Jones: Yeah, I feel like I've been doing this for donkey's years and I've had various roles in what's now, I guess the whole industry of itself. Starting way back in 2001 when I worked for a couple of firms, most notably one called Invest. It was subsequently bought by MSCI, which is like an ESG research outfit. And that was back in the day when ESG wasn't even a term back then. It was more like SRI, socially responsible investment. That was in the very early days. And from there, I've worked in asset management at places like Jupiter and what was then FMC is now called BMO Asset Management. Around some of the financial crisis, I stepped over to the asset owner’s side. So, I worked a couple of large asset owners, one called the Pension Protection Fund, and then after that, one of the larger London-based local authority funds called the London Pension Fund Authority. From there I moved into investment consulting actually somewhere that you worked, I think as well, Mercer.

    Jane Goodland: I think actually Aled, we were indeed rivals for a time, a few years. But you know, let's put that behind us. We're friends now. Okay?

    Aled Jones: So, I did that for a while. I've got quite a few years and then that was my last job prior to joining back FTSE Russell back in 2017. So, I've sort of been around the houses somewhat, I mean but the good thing is it's given me quite a broad and maybe unique perspective on things having worked in different parts of the investment chain. I mean all of which I hope I'm putting to the benefit of our clients today.

    Jane Goodland: And so now you're focused exclusively on sustainable investment index solutions, right? So just give us a bit of an overview of what that means in reality.

    Aled Jones: So for what, five and a half or ish years that I've been in FTSE Russell most of that time, or the vast majority of that time, I've worked in essentially a product development and product management role, very much focused on sustainable investment indices and largely on the equity side of things. And very recently I've shifted into a new role within the same business, the team's now called Sustainable Investment Solutions, as you just mentioned, and that is still very much involved in the product side of things, but taking more of a sort of broad cross FTSE Russell View, multi assets are looking at our fixed income as well as equities and sort of working more on, you know, product level consistency, looking to all our data sets a lot more and working very closely with our product and sort of quant research teams to keep doing all our good stuff around developing ESG and climate products.

    Jane Goodland: So indexes or indices, I never quite know which one to use, but you can correct me, I'm sure, if I'm wrong, but these are really important pieces of market infrastructure in the context of what we call passive investing, and that's undergone really huge growth. So perhaps, set the scene for us because I guess traditionally, we kind of envisage fund managers picking stocks and also on the fixed income side, for example. So very much stock selection, asset selection, but that's not the kind of the game in passive, is it? So, explain to us what it is and how it's grown over time.

    Aled Jones: Exactly, yeah there’s a very broad, we might call secular trend, right? Which is the shift of assets from kind of active to passive or more towards passive than they have been historically to the point where it depends on who you look at. We're now at either close to similar levels in both types of investment, active and passive. Some assessments say passive is slightly ahead or others slightly behind, but basically grown from, assets on a global basis, mostly being managed actively to these days, then being almost equal, and I'm sure the passive trend will keep growing. And as you say, it's not about active stock selection and that kind of manager a skill-based approach that you see in the active world. It's generally speaking, fairly systematic rules based, applying the same criteria across a very broad investment universe and creating an index or a benchmark and, benchmark. Benchmarks typically, well, I hope my colleagues don't feel I'm getting this wrong. But to me, a benchmark is a representation of, say, a whole market like the FTSE 100 is a representation of the UK equity market. An index could be the same but used perhaps more for funds and investment portfolio construction, that kind of thing. Certainly, think of ESG and climate indices as let's call them, derived versions of the underlying index or benchmark. But you're right, the growth in passive generally has been huge.

    Jane Goodland: What's driven it Aled, is it mainly kind of cost pressures because that's really quite a substantial growth, right? So, it's kind of a big shift. And depending on kind of where you look, the numbers vary quite considerably. But safe to say, now passive is a massively important part of an investment toolkit. So why the shift?

    Aled Jones: That could be quite a good strapline. Passive is massive.

    Jane Goodland: Did I say that. Is that mine?

    Aled Jones: I think I've heard that before. We can say that was you. You coined it right? I think largely cost, right? I mean, it's the sort of low from an investment perspective at least it's a lower cost way of accessing market returns be they broad equity market beta or in the fixed income market etc. So, I think that's a huge driver is the cost side of things. Probably also helped by things like in, at least when I first joined FTSE, there was a big focus on what some people call smart beta, we might call it alternatively weighted approaches, in other words, creating indices that aren't based on what we call market caps. So just how big you are basically, but based on other what's called fundamental metrics that might give you a better insight into the drivers of risk and return. And typically, there are things like momentum and size and value, these kind of traits. I think that that has helped because you can do these things quite easily in passive as well. But I think the cost side of things is a big driver. There's a general downwards fee pressure across the industry for a long time now and from an ESG perspective, I think the growth in availability of data across all sorts of themes, whether it's broad ESG or specific issues within that or climate themes, that data is now much more available than it used to be. And building it into index products or indices is fairly straightforward. So, I think that's helped. As you've seen the big rise in interest or use of passive. Just broadly, ESG is kind of ridden that wave as well and we've certainly seen it at FTSE Russell.

    Jane Goodland: And also, I guess we're seeing quite a lot more complexity in those ESG or SI indices, aren't we? So historically, it would be, I don't know, something quite rudimentary like exclusion of certain sectors or stocks. But now we see much more sophisticated approaches in terms of things such as the transition pathway initiative indexes or indices. But it's in terms of, you know, really trying to capture certain macro themes such as decarbonisation or growth of the green economy. Tell us about the different categories, if you like, of ESG indices.

    Aled Jones: I mean, this gets you into the wonderful world of definitions in our industry. Which is kind of used often interchangeably. But I think traditionally you've got, at least in my mind, you've got like exclusion-based approaches. You've then got the big bucket which is driven by things like the PRI of ESG integration. So, exclusions could be because you can't invest in certain things because maybe you're a faith based investor or whatever, it's not aligned with your values. ESG integration, I guess is a phrase or implementation approach, let's call it was popularised by the UNPRI I think, as a way to help mainstream these considerations by framing them as more as investment risks. I'd say personally, that's probably where most of the market tries to implement these things. And then you've also got, the impact investment side of things and then thematic as well, which could sometimes overlap.

    Jane Goodland: Without going down a rabbit warren. ESG integration very much focused on kind of protection of downside risk and taking that out of the portfolio from ESG factors got that. Impact and thematic, I mean, if that was a Venn diagram, there'd be quite a lot of overlap, wouldn't there?

    Aled Jones: You're right. I think some of these impact as a term probably is being somewhat stretched compared to what I'd say its traditional definition. So, to me impact investing needs to be very measurable what you're delivering in terms of positive outcomes or improvement. I think the purists would say.

    Jane Goodland: Sorry, and that’s in the context of social or environmental outcomes and impact, right?

    Aled Jones: Yes, exactly. So, and I think sort of purists would say that, What's the phrase? It's like additionality. You have to be delivering something that wouldn't have happened anyway. So, I think if you take a very curious view of impact investing, there's probably very few really robust ways of delivering that. then also it lends itself much more to, say, unlisted private market type investments that could be like a private debt fund focused on microfinance or maybe private equity that works with really small businesses delivering kind of localised social impact, that kind of stuff. But these days, there's a lot of listed equity funds that are positioning themselves of impact funds. And I'm not saying they shouldn't be, but it's definitely being stretched. And then you're right, thematic definitely overlaps, right? This part of the spectrum I think is trickier in the index world just because of things like data availability in particular. But we do, at least in FTSE, have something called the Environmental Markets Index series, which is definitely a green thematic approach. Whether it's an impact approach I guess is up for discussion. But it focuses very much on businesses that have a high level of revenue from green products and services, which I think is definitely green thematic, but I think impact in a traditional sense in the index context is probably a bit harder to deliver, not impossible, but it's just I think because generally speaking, not entirely, but generally speaking, the universe is that most investors look to in our world are sort of large mid and small cap listed companies.

    Jane Goodland: Yeah, and a broad index at that. It's actually capturing a market or a big segment of a market. I feel as if we've just had a lesson that's fab. Well now we're sort of on the same page in terms of the definitions and categories. And I like to think of it as a spectrum, actually, in terms of, the spectrum of investment and impact and lining them up. And where you put the slider ends up kind of where you are, and we talked about ESG integration. I always think about that kind of more down towards, in my mind, the left-hand side, which is fundamentally primarily focused on investment outcomes, but with kind of an ESG lens in order to take away some of that downside risk protection. But who knows if I'm right. We touched on the sophistication of some of these indices. And one of the things I'm kind of curious to dig into a bit is around how can and how are actually I'm sure that you're working with clients on this. How can investors get exposed to the decarbonisation trend and or effectively help kind of fuel that decarbonisation activity through indices? And do we have examples of that in play at the moment?

    Aled Jones: So, it's as you would expect, I guess, right? Thats a huge area of interest certainly in Europe, but not exclusively in Europe. This whole kind of decarbonisation, net zero, portfolio, construction theme, let's say is has become massive. And this is a good example of how, the world we kind of operate in kind of ESG, sustainable investment evolves very, very quickly. So not that long ago and probably around the time and from just before the time I joined FTSE. So, we were talking 2016, 2017, the discussion at the portfolio level for investors around climate change is very focused on carbon emissions and fossil fuel reserve exposure and that whole stranded asset debate. And Carbon Bubble report by carbon tracker. I think that was around 2015, the focus was very much, and we think of the data as well is carbon emissions and fossil fuel reserves. And it was about reducing your exposure to those things, largely as a proxy for climate risk in the future.

    Jane Goodland: And presumably also divestment from fossil fuels was quite a dominant conversation.

    Aled Jones: Exactly. It was like ex fossil fuel or maybe low-carbon approaches and that was reflected in the industries that were around at the time. If I remember doing a project when I was at Mercer for a big Spanish pension fund looking at ESG indices, and it was around 2014 time. It was the first time I'd really looked at these products and there was so little I mean, could fit a table on one page of A4 to cover everything that was out there. And it was mostly kind of ESG-focused. So, FTSE was on there for things like FTSE for Good, which is our long standing more kind of ESG focused approach. But climate indices didn't really exist back then. But anyway, fast forward to now. So, I guess you're talking what kind of almost a decade later, but probably less than that. The debate is all about net zero, which is a whole different level of complexity. So, it's not just about being having lower exposure to fossil fuels and high emission companies. It's about bringing in increased exposure to the green economy and in particular, especially through things like the way the EU has approached this with its kind of regulations on climate benchmarks. It's about delivering this kind of like year on year decarbonisation pathway in a portfolio. And that's a whole level, as you mentioned, of complexity, which is different to what people were thinking about in previous years. And also, you need different datasets that have only really existed for probably three, four years.

    Jane Goodland: Climate transition plans, right? We're only now doing that aren't we?

    Aled Jones: Yeah, exactly. It's extremely interesting and exciting for people like me that get to work with this stuff. But it's in a very narrow space of time, I guess the point I'm making the debate on this and what people are trying to do, or investors are trying to do has jumped massively forward, which is great to see.

    Jane Goodland: So, what are the index products looking like then, if an investor sort of rings up one morning and says, hi, Aled I'd like to invest in decarbonisation, what would you recommend for them?

    Jane Goodland: And this is not a sales pitch. This is just trying to understand kind of what an index looks like.

    Aled Jones: Everyone's looking to do things like this, it’s not least because of the EU climate benchmark regs, but we'd already been working on what I would call a broadly Paris-aligned index here is called the TPI Climate Transition Index Series, which we worked with Church of England Pensions Board to develop back in, we started talking to them in 2018, maybe even earlier. Just after I joined FTSE Russell and that was launched back end of 2018 and that was, we developed that over the course of 2019, and we launched it in 2020. And then at the same time, in parallel, the EU was doing its thing around looking at these EU climate benchmarks. So, we have this index series which captures data from the Transition Pathway Initiative, which is the TPI bit of the index name.

    Jane Goodland: And just for clarity by that, when we're talking about TPI, transition pathway initiative that is effectively assessing companies transition plans and the extent to which they are actually aligned with the goals of the Paris Agreement?

    Aled Jones: It's exactly that. They look at company level commitments like around, the strategy, operational level. They also look at, as you say, like these longer-term commitments to decarbonise their business. So, we take that data and build it into the index series alongside things like carbon reductions versus the benchmark green revenue exposure being increased versus the benchmark etc. So that's one pre-existing index series. And then we have another index series called the FTSE Climate Benchmark Series, which extends that same approach but brings in these additional requirements under the EU regs that created that particular benchmark series. And that series, the main difference between the two things is the EU approach you have to have this year-on-year decarbonisation pathway. So, your portfolio has to reduce its emissions exposure essentially over time, which is now becoming quite a widely adopted tool. Even if people don't adopt the off the shelf EU approach. This idea of a kind of a pathway in your portfolio and that definitely increases the complexity and challenges around building these kinds of products because you're forcibly creating a profile, let's call it, at the index level that is potentially quite different from the underlying universe. Because you're saying, okay, this portfolio has to decarbonise in line with the Paris goals of hitting net zero by 2050. But to be honest, the wider economy and the world at large is not on that same pathway. So, the risk is from the investment side is that you start diverging potentially significantly over time depending on what happens in the rest of the world from your underlying benchmark, which you always measure yourself to. So, there's lots of discussions with clients about that and how you can manage it and what things you can build into indices to help some of that because that kind of risk, I guess.

    Jane Goodland: But presumably investors who and I'm talking about kind of institutional investors here who are looking to get exposure to those types of instruments, they must understand that they're not buying something that is necessarily going to replicate market like investment returns, because effectively, the index is trying to do something quite different. But I can see how there needs to be a lot of conversation and understanding about what investors are getting so that there's no misalignment in terms of expectations.

    Aled Jones: Yeah, and asset owners in particular by which means of pension funds for the most part but it could be, other large sovereign wealth funds. But we speak to a lot of pension funds at FTSE Russell who are many of whom have made quite big commitments to decarbonise their overall portfolio and therefore very interested in these kinds of approaches. Pension schemes in particular, they have constraints around risk, right? So, they're always looking at how to allocate their investments across different asset classes and often using up something called a risk budget. Which is often in the equity world, at least based on historical volatility of returns or quite often in our world, it's based on tracking error, which is in a broad sense, how much your index or portfolio based on an index deviate from the underlying benchmark or market. They have to manage their investment strategy within these constraints. On the one hand, they're very keen to push the sort of climate improvements as far as possible, but they're very, very conscious of deviating significantly and taking on too much investment risk that pushes them outside of their overall kind of allowance at a whole fund perspective. So that's a challenge that you just have to work with. But it's an interesting one because the world isn't decarbonising quickly enough, essentially. And to then replicate a portfolio that is like said already does start to push you away from the underlying market and therefore you're tracking error, for example, starts to go up and you see things like your industry exposure can change a lot. Even sometimes your stock levels, a single stock exposure can change quite a lot. So, there's a lot of conversation with asset owners in particular about those parameters.

    Jane Goodland: Where you can kind of sit down and eyeball the, the asset owner and have that conversation at that level, I'm thinking about what some of the limitations are for sustainable investment indices. And immediately I'm kind of thinking that one of the limitations might be around taking a more, we're talking about quite sophisticated solutions here. So, would it be kind of fair to say that one of the limitations could be of taking something like that into the retail market? You know, might be trickier. But I guess fundamentally, my question is what can't these indices do? What can't they really deliver? Because I mean, so far so good. It sounds like they're they've evolved. They've become more sophisticated. They're doing decarbonisation. Surely there's stuff they can't do.

    Aled Jones: Yeah. I mean, I guess indices work and benchmarks work better in some cases than others mean they work. They work very well for a broad market exposure. So essentially, what a lot of our investment clients are doing is shifting, maybe they've got a big allocation to equities through a passive fund like developed market equities, let's say. And they're often or increasingly we're seeing them shifting that exposure from a sort of bog-standard vanilla market cap non-SI approach into something that captures SI considerations and increasingly climate. And then within these constraints we discussed. But, challenges arise, especially with this sort of net zero pathway based approaches as you move into narrower markets so maybe some of the smaller single country markets that have much fewer constituents in. So, like our developed market equity benchmarks here is the FTSE developed has something like 2000 stocks in it. If you go to the Italian equity market, a single country equity has something like 60 stocks in it. And then the FTSE 100, which we'll probably talk about at some point, has 100 stocks and it's a very different ball game delivering a decarbonisation approach from a net zero perspective in those smaller markets compared to a very large global market, and sometimes it might even just not be possible depending on what your constraints are. If you don't mind deviating from the underlying benchmark, which is very hard for us to owners, then there's more you can do. And actually you mentioned the sort of retail market, that market which is things like ETFs and that kind of stuff, that tends to be the tolerance for things like tracking error and deviation from the underlying universe or benchmark tends to be higher than you would for a typical asset owner because they're not constrained by an investment strategy and risk budgets. And they're not looking at liabilities and trying to trade these things off. The typical retail investor wants to just invest in equities or an ESG fund or a climate fund. So, I think that's partly why, if you look at good reliable market stats on this kind of stuff are quite hard to come by. But the growth in the ESG ETF market has been significant. I mean, one there's one outfit that tries to track this and they say at the back end of last year was something like $400 billion, now sit in ESG ETFs. And it was less than 50 billion just back in 2018. So, the recent growth has been phenomenal. It's still small compared to the overall ETF market. But the growth rates have been actually skied high. Partly because on the one hand there's more flexibility based on what I was just saying. But actually, the constraint you have in that world is more around complexity. So whereas with the big asset owner who've got the time and the people to kind of understand a more sophisticated methodology, which could be like a net zero approach in the retail market, you tend to need much simpler approaches that are easy to understand, which is why things like exclusion based approaches tend to do quite well in our experience. So, I'm not sure if that answers your question actually.

    Jane Goodland: No, it does. I mean my reflection on your comments are that actually when you start a conversation about passive investing, it seems quite simple and then it so quickly, gets so more complicated doesn't it? You know, when you think about the different types and the different kind of constraints and the different investor audiences, it's all fascinating stuff. I wanted to also touch on some of the things you mentioned about kind of main market indices and ESG versions. And I know that for example, we've had developed market ESG versions or all world versions. But one of the missing pieces of the puzzle in the past has been effectively a kind of an ESG equivalent to the FTSE 100, which is, of course, like the iconic UK, equity index. So, I hear that there that that has been addressed. So do tell.

    Aled Jones: Yes, something I've been working on with the wider team for a while now, like the last year at least is looking at the FTSE 100 in particular as you mentioned, like a real core flagship product. One of the things we're probably best known for alongside things like the Russell series in the US, which is the sort of default US equity benchmark series. I mean yeah historically guess it's sort of our attention on this has been driven by client interest and client queries which for a long time didn't exist. I think the reason clients have been asking more and more about things like FTSE100, which is, a very specific universe, just 100 stocks, large cap UK, is a reflection of the growth in the let's call it the ESG market for shorthand in general. So, when I first joined FTSE five plus years ago, conversations were really focused on these broad developed and emerging market universes so FTSE developed for your world. And I think that reflected the portfolios people were looking at. But I guess as they fill out their ESG and climate portfolio allocations, the focus has gone more and more towards regional and then single country underlying universes. So, a couple of years ago, we started to get questions about FTSE 100 and we sort of dug into it like said about a year ago now it's a tricky one, right? The UK market is from an ESG perspective, it's very overweight carbon. It's a very narrow universe. There's a few depending on what your perspective is, there's a few, let's say, maybe contentious products that are being produced by some of the companies in that universe.

    Jane Goodland: We've got quite a lot of resource companies in there, haven't we?

    Aled Jones: Resource yeah, we've got big tobacco companies, which is a traditional kind of exclusion for a lot of ESG funds. There's lots of stuff in there. It's reasonably challenging in that sense and its all very big companies. We do actually have quite a few products based in the UK market that exist already. So, we have things like FTSE for good, we have the Environmental Market series already mentioned, so green thematic versions, we have an exclusions only based approach with the global choice. What we didn't have was this sort of let's call it broad approach that sits very much in that kind of ESG integration category. We didn't have that. And in particular, we didn't have it for the FTSE 100. We had a couple of things on the FTSE All-share, which is the sort of full UK, market. We had most of the other things I mentioned are based on slightly different cuts of the universe, but the sort of the real what we call the UK, Equity series, which is the FTSE 100, 250, 350 and all share. We didn't have a yeah, kind of off the shelf broad ESG version of those benchmarks. So that's where the focus has been until now. So, we're just sort of fresh off the production line. We have that, it's called the FTSE UK ESG Risk adjusted index series. It's a bit of a mouthful, but we've tried to make the naming of it as clear as possible to indicate that this is what I would call an ESG adjusted version of the underlying universe.

    Jane Goodland: You are going to see some big names in there. And presumably it's kind of going for market like returns. So, it's trying to deliver similar investment returns to the FTSE 100 if there was no ESG at all.

    Aled Jones: No, absolutely. And I guess the exam question we were given by the clients we've been speaking to, was that can you deliver something that's relatively simple or straightforward, captures some of the sort of key ESG risks for the for that market, let's say, but doesn't deviate too much from the underlying risk-return characteristics and also tries to stick for the FTSE 100 in particular, tries to stick as close as possible to that level of constituents of around 100, which obviously we can't do because some exclusions are applied.

    Jane Goodland: Out of interest, what are those exclusions?

    Aled Jones: So, the three main parameters we're looking at. So, I guess the objective of the index is to reduce ESG risk exposure, let's say, in a very broad sense. And we're looking at ESG scores, carbon exposure, which includes scope one and two emissions and fossil fuel reserves exposure. And then we've looked at various product categories for exclusions and also like a controversy or controversial conduct category as well. So, the exclusions are things like tobacco and controversial weapons, thermal coal and this conduct screen essentially. And we've got different thresholds. Some of them is like any exposure, some is revenue threshold based. So, there were some additional fossil fuel categories as well, which was around maybe the slightly more controversial end of the fossil fuel extraction market to call it that. So, things like Arctic exploration, tar sands and essentially fracking shale gas, I think it's called.

    Aled Jones: That's also aligned with an existing series we have in the US called the Russell US ESG Series. So, we're trying to create a hopefully an expanding series of ESG adjusted single country universes. We've got US, we've got UK here and we can look at other markets over time.

    Jane Goodland: So then when you've got the rest of the companies then. What sort of ESG risk are you looking to sort of reduce versus the mainstream index?

    Aled Jones: From an ESG front, the underlying universe, if you look in aggregate, like the aggregate ESG score or performance, what do you want to call it of the FTSE 100 or the UK, in general is very high. When you compare it to other markets, it's something like 10% higher or almost 10% higher compared to the FTSE All-share So the full UK market, it's almost 15% higher than a broad global developed universe. So, it's already got a very high aggregate ESG profile, let's say.

    Jane Goodland: Big companies, good disclosure, lots of resources to throw at it kind of thing.

    Aled Jones: Yeah. I guess the kind of sectors that have taken, let's be honest, a lot of flak over the years and have made efforts trying to address that. They definitely have the ability to put more disclosure out there. I guess it's up to others to take a view on whether, things are being delivered or not. But if you look at companies just based on ESG scores, which try to measure the extent to which companies are looking to manage operational ESG issues, let's say, then these companies tend to do very well compared to a global average. So really what we're trying to do on that front because the FTSE 100 and the UK, in general is already very high on that basis, we're really looking to not make sure the index is never below the benchmark level. So, we've set this kind of 5% up to make sure it's always above, to push it much further than that starts to create challenges from an index construction perspective, if I'm honest. So, you could argue broader ESG risk is relatively low for the UK, because the companies are doing fairly well already. The main risk, which is the final of the three pillars I guess you could call it, is the carbon side of things. Now as I mentioned, the UK, is very overweight carbon compared to other markets because as you've mentioned, there's a lot of resource companies, whether it's oil and gas or basic materials or mining companies. So, we're looking to reduce exposures to carbon reserves, fossil fuel reserves by 50% versus the underlying benchmark. And then carbon intensity is also reduced by 50% versus the benchmark because there's also a lot of emissions in the UK, we've got utilities, and those energy companies and mining companies also have quite high emissions intensity. So, the three things together we believe deliver a kind of overall improvement in these broad ESG characteristics, let's say.

    Jane Goodland: I think it's really exciting and it's been a missing piece of kind of market infrastructure, I think, for quite some time. So, I think it's really great and I can understand why it's quite complicated. But fingers crossed it's going to be received well and will help to kind of develop the market further and complete the toolkit for investors because that's the idea.

    Aled Jones: Exactly And that's the point. We're filling what we see as a gap in our existing UK equity product range, we're delivering something that we've been asked for by the market and clients. I guess, two other things. This is essentially kind of ESG 1.0 for this particular UK, series and the FTSE 100, etc. But we will definitely enhance and evolve this over time. We've tried to target something that works in the current context based on available data, based on the direction of travel, on things like regulations, but also client expectations. But this will need like a lot of products, to be honest. It will need to evolve over time. You can’t expect to create something and just leave it forever. We have to make sure we're kind of evolving it over time. And if investors say to us, actually, there should be more exclusions or maybe you should be more ambitious on certain parameters, we'll definitely look to adjust that over time. But it's, as you know, your phrase around it's an additional tool in the toolkit is the important one. We're not saying this is the only way to address ESG issues in the UK context it's not a climate index. We have other versions of the UK market that are much more focused on climate. It's a broad ESG approach. It's something that we didn't have, and we hope it works for client needs.

    Jane Goodland: Aled it's been fascinating and a lot more complex and complicated than perhaps we might have thought from the outset. Thank you so much for sharing your experience and your wisdom and your real-life example of Sustainable Investment Index solutions. I think it's been really, really interesting indeed, and look forward to seeing how this evolves over time. So, thank you and see you soon.

    Aled Jones: Thanks very much. It's been a pleasure.

    Jane Goodland: So that's it for this week's episode of the LSEG Sustainable Growth Podcast. And I hope you agree. That was a fascinating conversation with Aled Jones. If you're not already following us, then please do follow us and rate us on Spotify, Apple Podcasts or any other podcast platform. And of course, if you've got any questions, comments or someone you'd like us to talk to next, then drop us a line at Thanks for listening. See you next time.

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