Millennials and female investors seeking ESG products: Q&A with FTSE Russell's Arisa Kishigami & Vanguard's Rachel White October 2018

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FTSE Russell has launched a new range of ESG indices, the FTSE Global Choice Index Series, of which one index has been used by Vanguard for their new Vanguard Ethically Conscious Funds. Industry Moves speaks to FTSE Russell head of ESG Asia Pacific, Arisa Kishigami (L), and Vanguard product strategy manager Rachel White (R) about the inception of the indices and the funds and the increasing demand they are seeing from investors for funds that align with their values.

What was the motivation behind launching the FTSE Global Choice Index Series and has there been a lot of demand for these kinds of indices from institutional investors?

Arisa Kishigami

Arisa Kishigami

The digital age has brought increased transparency and scrutiny to the way companies do business, giving institutional investors a clearer view into company practices and sources of revenue. This has led to increased demand for tools, including indices that help investors align their values with their portfolios by selecting companies based on their impact on society and the environment. Given the range of regional and client segment preferences, we expect to see more demand for additional versions to the FTSE Global Choice indices in the future.

How does FTSE Russell address the differing views and definitions around sustainable investing?

There is a vast array of terminology and definitions when it comes to sustainable investing, and people’s values can be quite varied. At FTSE Russell we have a track record of expertise in sustainable investing, dating back to 2001 with the launch of the FTSE4Good indices. A lot has changed over that time but one thing that hasn’t changed is the search for consensus around terms, definitions, and standards.

Among institutional investors, particularly large asset owners, the exclusionary approach to sustainable investment has long been an important tool in the toolkit. More recently many of those asset owners have shifted to a more integrated approach to sustainable investing but there is still a need for exclusion-based methodologies.

In order to deliver values-aligned investment solutions effectively you have to start by translating a broad and relevant set of environmental, social and governance (ESG) issues into definable, measurable characteristics of a company. That’s why we launched the FTSE Global Choice Index Series - to provide a tool for investors that want to align their investment choices with their values.

How do you balance excluding companies for poor conduct, and including companies for good conduct?

How you approach the construction of an index may depend on the objective of particular investors, which are therefore reflected in the objective of the index.

The FTSE Global Choice Index Series addresses both product and conduct from a screening approach. It distinguishes between a company’s involvement in certain products, ranging from non-renewable energy, vice products, and weapons, to companies with controversial corporate conduct. The objective is aligned with investors who wish to have their investment practices aligned with their values through negative screening.

How much involvement does the institutional investor have with FTSE Russell when you are constructing these indices?

We calculate over 120,000 equity indices on a daily basis, of which many are customised to suit the needs of the specific investors. At the same time, these custom indices often build off our headline indices, for example the FTSE 100 or Russell 1000, which represent the collective need of the institutional investors, which we serve. Therefore, the collective voice of the investor can feed into the construction of headline indices. In this example, in addition to the standard FTSE Global Choice index family, clients can construct bespoke ‘Choice’ indices using an innovative ‘building blocks’ approach, to customise alignment with their particular values and investment objectives.

What was the case for Vanguard?

The FTSE Global Choice Index Series were launched to meet the growing demand for value-aligned investments. Within the series, the FTSE Developed ex-Australia ex Non-Renewable Energy/Vice Products/Weapons Index was launched to reflect the broad interests of the Australian market. As a key player in the local market, Vanguard has worked with FTSE Russell to launch the new Vanguard Ethically Conscious International Shares Index Fund and ETF which uses this index as its benchmark to exclude fossil fuel reserves, nuclear power, alcohol, tobacco, gambling, adult entertainment and weapons.

Could you describe the process of working with FTSE Russell when creating the indices that became the basis for your Vanguard Ethically Conscious Fund?

Rachel White

Rachel White

FTSE Russell employs best practices in index construction, resulting in high quality benchmarks that are well constructed and offer comprehensive coverage of their respective markets. Vanguard has a long history of working with FTSE Russell globally, and we were pleased to partner with them again when selecting the index for the Vanguard Ethically Conscious International Shares Index Fund and ETF.

To identify the sector exclusions for the Ethically Conscious range, Vanguard undertook significant primary and secondary research, including input from FTSE Russell, to identify the issues important to Australian investors, and overlayed investment parameters to ensure we could offer a broadly diversified and enduring product.

Do you believe investors are demanding more of these kinds of funds?

The adoption of ESG investing has definitely accelerated in recent years. We are seeing an increasingly diverse set of investors interested in expressing their values through their investments while also seeking to achieve their investment objectives.

Institutional investors currently represent the largest source of demand for ESG products, however interest is clearly growing among advisors and individual investors.

Our research has shown advisors are increasingly seeking ESG products because their clients are asking for it, which is most prevalent amongst millennials and female investors.

What has the initial take up been like?

Reflecting on the pre-existing market demand we have had significant early investments from a number of institutional clients.

The response from our intermediary clients has also been overwhelmingly positive, and we have been having meaningful conversations with many of them about how to best implement these products within their client’s portfolio.

We are excited to be able to provide more choice for Australian investors while maintaining the hallmarks of Vanguard funds, low cost and broad diversification.

Ethical investing has been around for decades, but was traditionally viewed as a choice that would result in inferior investment returns. Is this no longer the case? Why do you think so?

Investments that consider certain ESG issues will, by definition, perform differently than the broad market because they are excluding or including certain companies than what would otherwise be represented in the index.

Any strategy that is not market-cap weighted may outperform in some circumstances and time periods and underperform in others.

We also encourage investors to consider cost and diversification when looking at ESG investing. Vanguard Ethically Conscious Funds are broadly diversified and while their sector weighting may differ from a broad-market index, they maintain broad diversification. Consistent with Vanguard’s philosophy on investing, our ESG funds are offered at a low cost to give clients the greatest chance of investment success.

What advice would you give anyone starting out in investment management?

I think there is a misconception that to work in investment management, you need to manage money, but there are so many other interesting and impactful roles within investment management firms. Working in product strategy, I help Vanguard create new products and assess trends in the broader market that may impact the future of investment management. This is such an interesting role, and I think anyone new to the industry should consider the vast range of options available to them at an investment management firm and find a role that aligns to their strengths and passions.

I also think it is important to consider where the industry is headed and not just where it is today and align yourself to this area of the market. I believe ethical investing and low cost investing are two fantastic examples of this.

FTSE Russell is not an investment firm and this article is not advice about any investment activity. None of the information in this article or reference to a FTSE Russell index constitutes an offer to buy or sell, or a promotion of, a security. This article is solely for informational purposes. Accordingly, nothing contained in this article is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of making any investment through our indices. These views do not necessarily reflect the opinion of FTSE Russell or the London Stock Exchange Group plc.

View Arisa Kishigami's profile View Rachel White's profile Read more about the FTSE Global Choice Index Series Read more about the Vanguard Ethically Conscious funds