Fintech, direct indexing are bringing ESG into focus

Fast developing financial technologies and the growing appeal of direct indexing are paving the way for the increased appeal and access to socially responsible investing among financial advisers and institutional investors.

According to new research by quantitative technology provider SigTech, fintech is seen as enabling increased portfolio customization when it comes to environmental, social and governance investing, which will go a long way toward addressing many of the challenges facing the general investment category.

“With ESG comes the need for customization, because we know there is not a universal standard,” said Daniel Leveau, head of investor solutions at London-based SigTech.

“If an investor has defined policy and goes out there looking for a strategy, that’s how custom indexing and technology comes into play,” Leveau said. “That wasn’t really the case five years ago, and that’s why [custom indexing and fintech] are related as the main driver in the use of ESG.”

SigTech’s survey of 100 institutional investors, which combine for nearly $1 trillion in total assets under management, found that 62% of pension funds and other institutional investors expect to increase their focus on ESG over the next three years.

Meanwhile, 14% said they expect their focus on the area to increase dramatically between now and 2024, with just 7% claiming it will decrease.

When considering the impact ESG will have on their investment activities, 43% of the institutional investors surveyed said the environmental factor is the most important one for them. Nearly one in three said social factors are, and 26% selected governance as their main focus area.

More specifically, when asked which ESG factors would have the biggest impact on how pension funds and other institutional investors invest over the next three years, 85% of those surveyed said they expect the focus on climate action to increase; this was followed by affordable and clean energy (68%), and 63% who cited good health and well-being.

“Just a few years ago it would have been a very daunting task for institutional investors to develop and implement their own index strategies, but it is now achievable,” Leveau said. “By applying the concept of alternative indexing methods, investors can gain exposure to different ESG factors that are optimal for them. Also, by owning certain securities directly, they can decide to what degree they want to be an active owner through voting and direct engagement.”