Planet Tracker sees challenges for index majors on sustainable front
Not for profit financial think tank Planet Tracker has been at it again, bringing disruption and challenges to the world of index providers. Their new report, finds that the largest index providers, MSCI, FTSE Russell, S&P Dow Jones and Bloomberg, are being challenged by innovative competitors – including their own clients – due to rising demand for sustainable investment.
John Willis, Director of Research at Planet Tracker says: “Our agenda is to align financial markets with sustainable issues and we are trying to look at important influencers. We feel there is not enough focus on these indexing companies and they are fundamental to the operating of the capital markets.”
Willis feels that the firms that the report names as ‘index majors’, such as the S&P 500, FTSE 100, MSCI World, are being criticised because of their lack of customisation and transparency over sustainability metrics, while growing sustainable investing demand means smaller, innovative index providers are responding with offerings that address these flaws, with ESG indices rising by 14 per cent across both equities and fixed income in 2019.
“The index majors are often out of the spotlight but sustainability has thrown them into the spotlight and there is a second tier coming up who are adaptable and driven by the sustainability theme,” Willis says.
Running an index requires a formidable reputation and a wealth of technology, Willis says, but it is extremely profitable. Planet Tracker estimates that according to EDITDA, the margin on an index is 75 per cent a year. “This means that for every pound invested in the index, I get 75p profit,” he says. “Do you want to change that if you are one of the big players?”
However, change is coming, whether the larger indexing firms are prepared for it or not, Willis predict. “I think it’s just months away – it’s just a question of who goes first and once someone does, it will open up.”
Willis believes that sustainable investors are increasingly questioning why they don’t get the choice. “We are suggesting that if you want to invest in a sustainable fund, why can’t you go to a website and tick boxes that represent your personal beliefs and up come the funds that meet them.”
He also believes that asset managers and individual investors can see that they can escape indexing costs by self-indexing.
By analysing communications from indices and banks, the Planet Tracker report gives three reasons why disruption is inevitable: falling fees, profitability attracting competition and demand for consumer choice, and to help the industry prepare for the inevitable disruption, the report provides recommendations for each stakeholder in the index landscape.
Willis believes that the unintended consequences may be of most interest to supporters of sustainability and ESG strategies, writing: “If corporate management teams become convinced that the inclusion of their company in an index is one of the most important drivers
of a share price, then there could be a scramble to adopt more sustainable and ESG strategies, to both win access to these indices and possibly lower their cost of capital.”