ESG-ETF convergence drives demand for bespoke indexes

Exchange-Traded Funds (ETFs) based on Environmental, Social and Governance (ESG) factors are increasingly seen as an important vehicle for helping to implement the United Nations Sustainable Development Goals (SDGs) and finance the investment needed in infrastructure, agriculture, energy, and public services. And the market is experiencing something of a boom, with assets under management in ESG ETFs having jumped three-fold from just under $59 billion at the end of 2019 to just over $174 billion at the close of 2020.

As the market grows, ETF issuers are changing how they work with index providers. As reported in ETF Stream, issuers no longer want to simply track available indexes. To ensure their ETFs have a genuine ESG impact in line with the expectation of the asset owners, they’re looking to collaborate with the index providers to create custom indexes. Some also see self-indexing as a possibility: a survey by Cerulli Associates found that 19% of ETF issuers expect to self-index while 57% see it as an opportunity.

Andrew Barnett, Global Head of Product Strategy at RIMES, comments: “As ETF issuers consider self-indexing, it’s vital they plan how they will gather the ESG data they need to build their index. This data needs to be of appropriately high-quality and fit for analysis, application, and scoring management, and delivered with a robust self-governance and monitoring framework.
“For firms with stretched data management teams, or who lack expertise in the ESG or data management fields, this can be a challenge. The alternative is to work with expert data providers like RIMES. We provide ESG data management as a service, which allows asset managers and ETF issuers to focus on the core task of building the index.”

Constantinos Demetriou, VP Product Manager at RIMES, adds: “Even once an index is built and the ESG ETF is up and running, the data management headache isn’t over. In the general ETF market, it’s important for firms to be able to dig down into the constituent data of the ETFs to understand risk exposure and performance at a holdings level. When it comes to ESG ETFs this visibility is important to show asset owners and regulators that the fund is delivering against the ESG mandate. This transparency will be vital to building trust in ESG ETFs over the long-term.

“Once again, RIMES can help managers with this task: our ETF Data Management service delivers complete visibility into ETF holdings so that managers can report back with confidence to investors.”

RIMES Managed Data Services is a proven data operating platform that helps firms of all sizes and in all regions align their data consumption closely with business needs. Contact us to learn more.

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