In the second part of an interview, Tianyin Cheng, director, Strategy and ESG Indices at S&P Dow Jones Indices, talks about what drives investment in new environmental, social and governance (ESG) structured solutions and the benefits of sustainable structured products.

"The driver of demand for ESG structures still comes mainly from asset owners, because they are the key players who can generate a real change," said Cheng. "From a product provider point of view, knowledge, capability and experience in ESG will help to address asset owners' requirement when demand comes up."

ESG is no longer seen simply as a means to do good, but also a way to address a combination of financial, risk and ethical objectives, according to Cheng, who cites a State Street Global Advisors' 2017 ESG Institutional Investors Survey.

Around 75% of the investors surveyed with ESG strategies expect the same returns from those investments as they do from others, according to the survey. The same proportion of investors surveyed say that risk mitigation is a driver of their increased interest in ESG as they seek to manage the potential reputational effect of ESG factors on performance. Additionally, more than three-quarters also say they are motivated by a belief that ESG credentials play a role in wider financial performance, which is broadly in line with the proportions for other factors, such as ethical values and a desire to see positive environmental or social impact.

Though the survey did not provide the breakdown for Asian investors, the motivations in Asia are in-line with those of global investors, according to S&P DJI's clients.

Sustainable structured products offer a number of benefits to investors, according to Cheng. In addition to social and environmental benefits, they allow "potential risk mitigation and return improvement", according to Cheng. "A 'new world' of investing has emerged, driven by macro and mega trends and affected by event-led or systemic risks which can lead to cost to capital of companies around the world," said Cheng. "Key here is that the ESG implication on financial performance is forward-looking, and hence hard to be tested by using backward looking data, such as a backtest."

Trucost has done a lot of work in this area to create the analytics, according to Cheng. "The challenge here, however, is to pick the most financially material disclosures and augment what is disclosed with pertinent proxy data," she said. "For example, S&P DJI and Trucost have launched a carbon pricing tool to provide a forward-looking lens on business exposure to carbon risk."

The S&P Global 1200 had the highest carbon efficiency number (241), while the index provider's Global 1200 Fossil Fuel Free Carbon Efficient Select Index exhibited the lowest carbon efficiency (89), a reduction of 63%, according to data from S&P DJI.

"Significant changes are underway in the understanding and incorporation of carbon data by market participants," said Cheng. "Historically, there has been a concern that low-carbon investment might lead to financial sacrifice, but new research, climate events and technological developments suggest that carbon integration is important for understanding risks and opportunities."

However, the finance sector is quickly responding to the increasing external interest from governments, regulators, asset owners, and institutional and retail investors, according to Cheng. As a first step, many market participants will likely look critically at their current positions and consider other available options. "Leaders in the space are already innovating and identifying more holistic approaches," she said. "Over time, we expect that progressively more sophisticated strategies will be employed, including ones that look more deeply into industry shifts occurring that support a low-carbon future, as well as alignment with 'two-degree' goals."

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