As a concept, environment and social governance has been around for 30 years but, in recent years, the implementation has been changing. Remy Briand (pictured), head of ESG at MSCI, tells SRP about the index provider's ESG background and how it is only a matter of time before sustainable investing becomes mainstream in the structured products market.

"We see adoption rates steadily growing in line with what we have seen over the last few years, with institutional investors (pension funds, large asset managers...) deploying different ESG strategies and different forms," said Briand. "We have also been approached by third-party product providers, such as HSBC, to develop new indices to be used specifically in structured products and exchange-traded funds (ETFs)."

ETFs are driving most of the activity around ESG indices, but the adoption curve is still low and there is a lot of room to develop, not only in terms of investor adoption but also delivery instruments, according to Briand. "The growth is happening at a fast rate compared to the past, but the number of investors is still relatively low," said Briand. "ESG is benefiting from a high growth rate, but in proportion and compared to other types of investments the adoption is relatively low."

The index provider does not have a view on the best way to deliver ESG strategies, because "we're product agnostic, and our indices can be delivered in different ways", according to Briand. "This is just a reflection of the cycle of adoption," said Briand. "ETFs have the appeal that they are straightforward and cheap strategies to deliver and provide exposure to new assets, but investors have different needs; not every investor wants a long-only fund, and structured products can deliver ESG strategies via more complex structures that meet the needs of other investors. We have seen investment banks also moving to capitalise on this trend and build ESG-based structured products which suggests there is demand."

ESG will become more visible in the structured products market because "as demand for ESG grows, the number of products and ways to deliver will also grow", according to Briand. "Structured products are known for their flexibility to deliver thematic strategies," he said. "There is also a conjunction between banks and index providers in this area around different skills and functions. ESG requires a high level of expertise and banks don't have it, and we also have the data, but banks have the product knowledge and manufacturing capabilities to meet the needs of different types of investors and risk profiles."

Another unrelated factor that is bringing index providers and investment banks together is the benchmark regulation, which is forcing banks to review their indexing activities to avoid conflicts of interest around their offering. Banks are increasingly looking for index providers to act as calculation agents for their indices or offloading that function altogether, according to Briand. "We are seeing more and more indices that were manufactured by investment banks deployed via structured products no longer being administered by banks," said Briand. "This is also opening opportunities for index providers, because we follow all aspects of the regulation and we do not have a conflict of interest from an investment perspective."

At a company level, the increasing demand for ESG and other themes will open up opportunities for the index provider in structured products, according to Briand. "Demand for different products is also increasing, because you now have different risk profiles and end investors (retail, high net worth) seeking to get exposure to these strategies and used them in their portfolios," he said. "The two traditional sources of demand for ESG strategies - institutional and retail - are increasingly looking at ESG for different reasons, but this is fuelling supply. Retail investors are becoming more open to alternatives and retail networks have been forced to include these products in their offering, and that's why we think it is a matter of time before ESG becomes a mainstream consideration for investors."

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