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Sustainable smart-beta strategies attract global investors
Asset owners favour re-weighting based on sustainability criteria over negative screens
7 Aug 2020 | The Asset

More than seven in 10 asset owners globally are evaluating and implementing sustainable investment (SI) considerations in their investment strategies in 2020, according to a recently published report.

The report, by global index provider FTSE Russell, also points out that among those using or evaluating smart-beta strategies globally, 58% anticipate applying SI considerations to their smart-beta strategy, up from 44% in 2019.

Nearly half of respondents who anticipate applying these considerations to their smart-beta strategies expect to increase their allocation to SI smart beta over the next year or two.

While evaluation and adoption of sustainability considerations grew for asset owners across the entire assets-under-management (AUM) spectrum, appetite was notably higher among larger asset owners. Eighty percent with AUM of US$10 billion or higher have evaluated or adopted sustainability considerations, compared to 54% in 2019.

The region of Europe, the Middle East and Africa (EMEA) still leads, with North America a fast follower. In 2020, the rate of sustainable investment evaluation and adoption among asset owners in EMEA (85%) remains higher than that of North America (63%).

In addition, EMEA still leads the way in applying sustainability considerations to smart beta – over 80% of EMEA asset owners evaluating or using smart beta expect to apply sustainability considerations to smart beta, up from 73% last year.

However, the regional differences highlighted in 2019 are narrowing. In North America, the evaluation and implementation of sustainable investment approaches broadly within asset owner portfolios increased over 20 percentage points since last year, to 63%.

Among North American asset owners evaluating or using smart beta, the percentage that expect to apply sustainability considerations to smart beta increased notably, from 17% in 2019 to 42% in 2020.

Climate risk is a hot topic for asset owners in 2020. Among those who anticipate applying sustainability to their smart-beta strategy, climate risk/carbon tops the list of sustainability themes at 64%, with environmental considerations close behind at 59%, while governance and social themes are also widely considered, both at 55%.

In addition, the most common application of SI data has shifted in favour of re-weighting. There is a notable decline in interest in negative screens, from 64% in 2019 to 48% in 2020, coinciding with a growth in the more sophisticated approach of re-weighting based on SI criteria, 55% in 2020, compared with 36% in 2019.

Globally, among asset owners evaluating or implementing SI, there is significant interest in equity (85%), followed by fixed income (58%) and multi-asset (31%).

Fixed-income applications of sustainable investment considerations, which have historically trailed the equity market, are particularly strong in EMEA where 75% of respondents are currently implementing or evaluating sustainability considerations for this asset class, compared with 45% in North America.

The survey was conducted in January and February 2020, with 139 global asset owners participating, the majority of whom were located in North America (37%), EMEA (37%), and Asia-Pacific (21%).

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