Following the licensing last week of the iStoxx Global Diversity Impact Select 30 Index and the iStoxx Europe Diversity Impact Select 30 Index to Goldman Sachs to be used as an underlying for the issuance of structured products, SRP spoke to managing director, Emea equity derivatives sales, Tom Groothaert, and Pooja Mishra Prahlad (pictured), European equity and fund derivatives structuring, at Goldman Sachs, about the increasing shift toward ESG strategies in the structured products market and the bank's plans in this area.

The partnership with Stoxx is an indication of the increasing demand for ESG strategies and the ESG segment overlapping with smart beta, but it will not be an exclusive collaboration, according to Groothaert.

"We do not exclusively partner with Stoxx but we always work with best in class partners when we develop investment solutions for our clients," said Groothaert. "Stoxx is a leading provider of ESG and smart beta indices, and since the products are targeted at our European investor base it made sense to partner with them for this range. Stoxx has a comprehensive ESG range and the work they have done with Sustainalytics on ESG screening has been very significant and it meets our requirements around sustainable investing."

The shift towards ESG responds to "a variety of trends in this space" and an increasing number of investors seeking "to integrate ESG information into their investment process holistically - but still be very driven by performance outcomes", according to Mishra Prahlad.

"Others are predominantly driven by the social impact of their investments to the extent that they would exclude assets and potentially forego returns solely based on social responsibility criteria," said Mishra Prahlad, adding that although "the measurement of ESG/SRI variables are not standardised across investors" the bank has received requests from investors "who desire access to the benefits of workplace diversity, those who care about corporate governance and also those who would like to penalise investments with adverse environmental impact".

"We see our role as facilitating access and helping clients achieve their investing goals," said Mishra Prahlad, pointing that there is no perception among investors that ESG strategies will result on giving up performance. "Personally [I] have not come across this, and invariably the disappointment is similar to that from any misunderstood/ incompletely analysed investment proposition - performance vs. expectations and fees," said Mishra Prahlad. "Here are set of broadly available and well-constructed benchmarks would go a long way to anchoring investor expectations."

The proliferation of ESG strategies and the overlapping with systematic, smart beta and other thematic strategies comes as no surprise, according to Mishra Prahlad."We have investors that have been deploying smart beta strategies in their portfolios over the last five years that are now looking to incorporate ESG signals in their allocations - as especially many of the metrics lend themselves to be incorporated into a systematic investing process," said Mishra Prahlad.

The US investment bank is now seeking to capitalise on the iStoxx index family and "build products with a thematic payout", according to Groothaert. "We have the structuring capabilities to develop structured products aimed at different risk profiles," he said. "We work very closely with our clients and have a customised approach when developing new products as we want to meet specific needs and develop ideas that are relevant to our clients, and provide alternatives with no limitations."

Investors will also benefit from accessing the iStoxx indices through different wrappers and payoff types in an efficient way, according to Groothaert. "The iStoxx indices are also very liquid and provide opportunities for scalability and customisation which is also an important factor when developing products as you want to be able to balance protection and yield through different payoff profiles and instruments including swaps, structured notes or index-linked products," said Groothaert, adding that the new range is being developed with institutional and retail investors in mind as there is demand from both types of investors.

"ESG is now a global phenomenon and from that perspective we want to offer solutions across the board. There is higher appetite in some jurisdictions and we will respond to that demand with relevant solutions for public distribution as well as for fund managers, insurance and pension funds seeking new ESG strategies for their portfolios."

Thematic overlapping

ESG and smart beta have increased their visibility in the capital markets over the last few years and have become a lot more mainstream as these used to be difficult-to-access areas only available for sophisticated investors. For many investors ESG is seen as a way to generate beta "so it's part of the base filter and then you can add different factors to extract value of the underlying assets", according to Groothaert.

"We don't see these themes competing with equities but there is a clear trend around ESG and smart beta and we expect inflows into those themes," said Groothaert. "We will continue working on new ideas and developing new strategies to meet the needs of our clients."

Groothaert also noted that despite the increasing momentum of sustainable investing and systematic strategies, the structured products retail market will continue to be driven by equities.

"We see opportunities around equities because despite the volatility observed over the last few weeks, investors are risk on and equities and structured equity products will provide solutions to deploy the more bullish market views," said Groothaert. "This can also be applied to other asset classes such as commodities which are also in demand. Conservative investors will continue to demand capital protection and we are committed to provide solutions across different risk profiles."

The iStoxx launch is an example of ESG becoming mainstream and bank wants to provide access to this specific theme of diversity impact to its clients, as well as leverage its structuring capabilities to deliver solutions according to their needs, said Groothaert.

"Our ultimate goal is to deliver value to our clients," he said. "This we can do via more mainstream investment solutions and strategies but we also work with them to provide them with access to assets that are more difficult to access."

Mishra Prahlad noted that Goldman has implemented a concerted strategy around ESG for over a year now.

"The focus on ESG was previously largely in response to client needs," said Mishra Prahlad, pointing that the bank now wants to offer a whole range of solutions across asset classes, both around underlying invest met exposure as well the wrapper.

"We want to be a 'one stop shop' for investment solutions and for this you have to be visible across markets, asset classes and strategies. This is not only about bringing to market new technology or something that no one has ever seen but about providing a comprehensive offering that is empathetic and responsive to different investor needs. We are developing solutions across asset classes whether it is equities or other asset classes, and bringing new investment concepts to the market (diversity, green or governance) so that every investor can access a complete set of solutions."

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