Market volatility knocks ESG off top concern for indexers

Rick Redding, IIA

The index world has been front and centre in a lot of recent stories about volatility, says Rick Redding (pictured), CEO of the Index Industry Association. He points to illiquidity in bond markets which has driven investors to find liquidity in fixed income ETFs instead.

“On most of the major exchanges in the world, ETFs have become a bigger part of the trading,” Redding says. “In these kind of market stress situations, people tend to move where there is liquidity. Sometimes it’s not exactly what their portfolio looks like, but if they need to move to where the liquidity is, it tends to be in the indexes.”

This in turn has had a big impact on the IIA members, with Redding receiving a lot of enquiries about forthcoming regulatory changes and looking for information on how ESG indexes need to be constructed to comply with the EU regulation.

Redding will be speaking at the etfLIVE digital event later this year as a panellist on the construction and range of indices underpinning the ETF market.

He was planning to speak about some of the survey work that has been done with the IIA’s members, but comments that the world is a different place now.

“There have been underlying areas where the research was interesting and where new indexes are coming from and I wanted to try and give a little perspective of what types of indexes we have seen growing over the last couple of years and some that are not so prevalent as they once were,” he says.

The last couple of years have seen growth in ESG and fixed income indexes whereas, what was topical, was smart or strategic beta, he says.

“A lot of that interest has moved to ESG,” Redding says. “In Europe, you have regulation moving in that direction to standardise ESG but it is difficult at this point as input data is not standardised anywhere in the world – it’s different from some countries to other countries.”

The other issue is that on the demand side, investors aren’t demanding the same things.

“There is a lot of commonality but there are things that are more controversial which makes it difficult for people to agree on ESG standards.”

Redding is also scheduled to speak on the regulatory panel at the etf event later this year and is focusing on the European regulatory change due at the end of April this year on ESG benchmarks.

“There are two new consultation papers from Europe on the requirements for benchmarks,” Redding says. “All asset managers and administrators are to explain how their underlying ESG factors are reflected in their benchmarks.  Two climate benchmarks have been designated trying to standardise ESG criteria along the Paris aligned benchmark and a transitional climate change benchmark.”

These are standards that people will opt into, Redding says. “But if you want to be approved with those benchmarks, you have to follow the criteria set out by Europe and ESMA. It’s topical because it’s not clear how that’s going to happen at a local national regulator level by 30 April.”

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