Smart sustainability still a nonstarter in North America

Despite the growing popularity of ESG, asset owners hesitate to integrate them into smart-beta strategies

Smart sustainability still a nonstarter in North America

Given the rising interest in ESG investing as well as smart-beta strategies, it should only be a matter of time before investors get to see vehicles that combine the two into one package. But new research suggests that compared to their European counterparts, those in North America will have a longer wait ahead.

Drawing on data from its annual smart-beta survey, FTSE Russell looked at how asset owners in different regions vary in terms of applying ESG considerations to smart-beta strategies — an approach that it referred to as “Smart Sustainability.”

“Among those respondents who are using or evaluating smart beta, 44 percent (worldwide) said they anticipate applying ESG considerations to their smart beta strategy,” the index provider said in a recent note.

But while 77% of European survey respondents that currently have or are considering smart beta allocation in their portfolios said they might incorporate ESG considerations this year, only 17% of those in North America said the same.

Among those that are pondering the integration of ESG to a smart beta strategy, long-term risk was top-of-mind. That’s in line with increasing public concern on issues such as pollution, sustainability, and climate change. Acceptance of climate change as a financial risk has been accelerating, FTSE Russell said, noting efforts by Bank of England Governor Mark Carney and the UK Financial Stability Board to take a lead on the issue. Similar concerns have been raised domestically, with the Bank of Canada flagging climate change as one of the top vulnerabilities for the country’s economy and financial system.

“[T] he same cohort of survey respondents cited governance, carbon and social issues as the top three ESG issues they wished to address in a combined smart beta/ESG allocation,” the index provider said.

But the respondents with no plans to synergize smart beta and ESG presented a different perspective. Focusing on the North American cohort, 70% cited a lack of stakeholder demand as the top reason for their hesitation. “If pressure to promote sustainable investment policies is heightened in some markets, in others it appears relatively absent,” FTSE Russell said.

One reason behind this cagey attitude among North Americans could be a concern about performance. The report underscored the commonly held belief that ESG issues should remain separate from traditional risk/return measures, along with widespread angst over possible fiduciary liability from letting ESG criteria detract from return-seeking approaches.

But “Canadian respondents are diverging from their North American neighbours,” the commentary noted. More than four tenths (83%) said they are implementing ESG considerations into their broader portfolios, while 43% had plans to apply ESG considerations to smart beta.


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