How FTSE Russell sees indexes evolving into digital assets, ESG

FTSE Russell execs outline what processes shape their index making as new asset classes and investable areas grow in popularity

How FTSE Russell sees indexes evolving into digital assets, ESG

FTSE Russell writes recipes, at least metaphorically. David Sol, Global Head of Policy and Governance at the international index maker, explains how he sees FTSE Russell’s purpose in the investment landscape, creating a clear outlining of ingredients and processes that portfolio managers can follow to deliver exposure to a specific index. As trillions of dollars follow globally into index funds, the process that underpins them will dictate how new and emerging assets are eventually indexed.

Sol, and Paul Bowes — Head of Canada at FTSE Russell — told WP how they build their index ‘recipes,’ outlining the rigor inherent in their processes. Within that, however, they highlighted how a rapidly changing investment landscape is pushing them to innovate and meet investors’ demand for new products and exposures. They emphasized that, while they write the recipes, their relationships with the investment ‘chefs’ underpins every stage of their work.

“I think what's important to note that the index provider writes the recipe but we don't do the cooking,” Sol says. “What recipes are to indexes, cooking is to actual investing. We don’t trade, we don’t execute, we don’t buy and sell securities, we don’t cook. We need to speak to the chefs who do the actual cooking and ask portfolio managers how they are experiencing the index, asking them if they can execute and replicate the index.  That's why we need to engage all the time making sure that what we're proposing that recipe makes sense. And that takes a lot of organization.”

Sol noted that FTSE Russell is focusing on delivering new indexes and exposures to two rapidly growing global investment areas: ESG and digital assets. Both ESG and the emerging digital asset space — which includes cryptocurrencies like Bitcoin and Ethereum — require new degrees of risk assessment and rigor to appropriately index, even as more of FTSE Russell’s partners push for access to them.

Sol notes that digital assets have taken something of a reverse route to indexes. Normally a new investable area begins with institutional asset managers before moving, via indices, to retail investors. Conversely, crypto and other digital assets started retail and have become more institutional. Regulation will be key to the more global adoption of crypto assets inside index funds. Sol highlights the FTX scandal and resulting trial of Sam Bankman-Fried as mirroring past scandals in banking and other industries that gave rise to more stringent regulation. With that regulation will come greater integration into indexes and the further legitimation of digital assets in the eyes of investors and advisors. It’s an area where Canada has already shown some leadership.

“I'm very excited about what we're doing in the digital space. The OSC has been somewhat farsighted and is open to the idea that ETFs based on digital assets are acceptable products in this country, unlike the United States,” said Paul Bowes, Head of Canada for FTSE Russell. “I think there's an opportunity here for our investing community to take advantage of that. This is still a relatively nascent asset class but you’re going to see some things come out of FTSE Russell in the coming weeks and months that position us at the forefront of this asset class.”

Bowes notes that FTSE Russell is already partnering with a company called Digital Asset Research as it conducts appropriate diligence on digital assets. They’ve also recently announced a deal to cooperate more with Grayscale, a global crypto asset manager. He notes that while FTSE Russell has a wide array of talent and knowledge, when it comes to new investable areas these partnerships can be crucial to delivering the right index.

ESG has been another emerging area, and one that highlights many of the shades of grey found in values-based investing. While FTSE Russell has launched more ‘black and white’ indexes, such as a global bonds ex-fossil fuels for the University of Toronto pension fund, investors and advisors are expecting more nuance. To meet that expectation FTSE Russell is working on indexes that match the ESG definitions of their specific clients. They’re starting in the fixed income space, an area of strength for them, and give their perspective on what their partners want included and excluded in an ESG index.

Both ESG and digital assets are evolving rapidly as technologies and investor sentiments shift. Keeping pace with that change and delivering indexes that match the needs of investors and advisors can be a challenge, and in the face of it Sol says FTSE Russell is leaning, in part, on the expertise and scale they already have on hand.

“Knowing what the client wants is the most important question, but we have already 1.4 million indexes, so there’s a decent chance there is already something that roughly looks like what the client is looking for, and then we can make some adjustments,” Sol says. “For us in the business its always thinking about how our datasets are evolving, are they becoming richer, are companies reporting more, are we keeping track of regulatory developments? It becomes a cadence of moving from quarter to quarter.”