Crises tend to accelerate trends. The upheavals of 2020 — from the global pandemic to the movement for racial justice and the ongoing threat of climate change — have undoubtedly helped propel environmental, social, and governance (ESG) investing into the mainstream. ESG-related topics have never been so central to the investment conversation. Assets are growing and the connection between ESG and risk is strengthening.

But ESG also requires that investors expand their toolkits. And it poses a range of challenges to investment managers and index providers alike.

The global response to climate change represents the “most significant economic transition in history,” according to David Blood, the co-founder of Generation Investment Management, and an investment opportunity unlike any he has seen in his 35-year career in finance.

“The economic opportunities of this transition, from a poverty and inequality perspective as well as a climate change perspective, are extraordinary,” he said, speaking on the second of a series of webinars organised by London Stock Exchange Group (LSEG) and the Principles for Responsible Investment (PRI).

Generation Investment Management, founded in 2004 by Blood with Vice President Al Gore, manages nearly $20bn in assets invested in companies its fund managers judge to be sustainable. “We want all CEOs to engage on climate, we want them to demonstrate action around the Paris accord or net-zero, and we want them to be clear about their goals,” he said.

“If they see the risks, but critically...

With the guidance and direction of FTSE Russell’s independent practitioner committees, FTSE Russell regularly consults the market on changes to the methodology of its indexes to ensure that the indexes continue to meet investors’ requirements and define and lead global standards in indexing. The proposals set out in the various consultation documents are included in order to gather valuable market feedback and may or may not result in changes to FTSE Russell methodologies.

With the guidance and direction of FTSE Russell’s independent practitioner committees, FTSE Russell regularly consults the market on changes to the methodology of its indexes to ensure that the indexes continue to meet investors’ requirements and define and lead global standards in indexing. The proposals set out in the various consultation documents are included in order to gather valuable market feedback and may or may not result in changes to FTSE Russell methodologies.

By Tim Batho, (chief strategist, index policy, Asia Pacific)

Our recent announcements regarding the conclusion of the first phase of China A Shares, and of the final tranche of Saudi Arabian stocks into our FTSE Global Equity Index Series (GEIS) matters because asset owners and managers allocate according to the classification, and investment flows into promoted countries are also impacted.

In a recent blog we explained how we differentiated between developed and emerging markets in our country classification processes. But we also differentiate, within our Equity Country Classification framework, between Secondary Emerging and Advanced Emerging status. Why we do divide the emerging market classification in this way?

Historic perspective

The genesis of this two-band emerging market structure dates back almost 20 years, when the country and capitalization coverage of the FTSE global equity indexes were expanded with the incorporation of the Barings...

By Philip Lawlor, head of Global Investment Research

Amid the relentless ascent in global equity valuations since March, none has soared as high as those of US stocks.

As shown below, the Russell 1000 multiple is up more than nine points from its March low, far outdistancing the average five-point gain for its developed peers. At a forward PE of 22.9×, the Russell 1000 is near a 15-year peak and has further widened an already huge premium to those of other developed markets, which have converged around 15-16×.

Regional 12-month forward price/earnings ratio (×)

Source: FTSE Russell / Refinitiv. Data as of July 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

As the chart below illustrates, multiple expansion has been the major driver of the risk rally that began in late March. It has occurred despite double-digit declines in forward EPS forecasts for most markets over the same...

NOTICE: The names of the indexes are changing from “Citi [Name of Index]” to “FTSE [Name of Index]”. By July 31, 2018, the transition will be complete and the use of the “Citi” name in the name of the indexes will cease. A full list of the Citi index names and the new FTSE names can be found here. Please note that during this transition period, there may be a short time where updated materials that contain the new FTSE index names will co-exist with legacy materials that still contain the legacy Citi index names.

With 97% of U.S. ETF assets in funds that track an index, and overall assets continuing to grow rapidly, indexing has never been more central to the overall investing landscape.

Perhaps nowhere is this more apparent than in the months immediately leading up to and following the annual Russell Recon - where companies are added and removed from key benchmarks.

Catherine Yoshimoto, Director of Product Management at FTSE Russell, joins the podcast to discuss 2020's top trends - and what they mean for investors' ETF portfolios.

With 97% of U.S. ETF assets in funds that track an index, and overall assets continuing to grow rapidly, indexing has never been more central to the overall investing landscape.

Perhaps nowhere is this more apparent than in the months immediately leading up to and following the annual Russell Recon - where companies are added and removed from key benchmarks.

Catherine Yoshimoto, Director of Product Management at FTSE Russell, joins the podcast to discuss 2020's top trends - and what they mean for investors' ETF portfolios.

Investors have grown increasingly more sophisticated when it comes to understanding of the risks and opportunities arising from climate change. So have their approaches to capturing these aspects of climate change in their portfolios. The market has taken evolutionary steps as it has developed from relatively simple risk-based implementation options—such as creating "ex fossil fuel" or "low carbon" portfolios—to approaches that also capture the potential upside from the transition to a low carbon economy,  e.g. via increased exposure to the global green economy.

Up to now, the missing piece has been a robust, data driven approach to capturing the forward-looking aspects of corporate efforts to adjust their businesses for the climate transition.

For investors concerned about climate change it’s the number one question: what impact will the Covid-19 pandemic and the massive economic and social response to it have on efforts to address the growing climate emergency? The answer, from speakers our  recent London Stock Exchange and Principles for Responsible Investment webinar, was unambiguous.

“The ultimate outcome of this pandemic will be indeed to accelerate the energy transition,” said Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management. “The structural pressures that have been bearing down on the fossil fuel energy industry with increasing force over the last three or four years will still be there as we come out of lockdown.

“And these structural pressures will be exacerbated by behavioural changes that we've had to make during the lockdown,” he said, which will impact demand for fossil fuels generally and for oil in particular. 

Lewis went on to set out...

By Philip Lawlor, head of Global Investment Research

Amid the relentless ascent in global equity valuations since March, none has soared as high as those of US stocks.

As shown below, the Russell 1000 multiple is up more than nine points from its March low, far outdistancing the average five-point gain for its developed peers. At a forward PE of 22.9×, the Russell 1000 is near a 15-year peak and has further widened an already huge premium to those of other developed markets, which have converged around 15-16×.

Regional 12-month forward price/earnings ratio (×)

Source: FTSE Russell / Refinitiv. Data as of July 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

As the chart below illustrates, multiple expansion has been the major driver of the risk rally that began in late March. It has occurred despite double-digit declines in forward EPS forecasts for most markets over the same...

By Philip Lawlor, head of Global Investment Research

Our research shows investor sentiment toward emerging and developed markets has decoupled, coinciding with the recent stretch of EM outperformance. What's behind this unusual divergence?  

Select FTSE Russell Composite Sentiment Indicator (CSI) Z-scores

Source: FTSE Russell / Refinitiv. Data as of July 15, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

Our proprietary Composite Sentiment Indicators use Z-scores ranging from 1 (extremely oversold/confident) to 5 (extremely overbought/fearful) to measure how much a current reading is above or below the long-term average. We monitor extreme high or low CSI readings for clues of possible turns in market direction.

After peaking at levels of high optimism (above 4) in late January, CSI scores for the Russell 1000, FTSE World ex USA and FTSE Emerging all plunged to extreme...

Quality and Profitability market factors have continued to lead US equity markets this year, despite a brief rally in Size during the second quarter, according to our most recent factor insights.

Philip Lawlor – managing director, Global Markets Research, FTSE Russell: “In uncertain times, investors continue to gravitate toward healthy US companies with strong balance sheets, low debt and high relative profitability. And, as the COVID-19 recovery story started to lose some of its luster—or at least its immediacy—in June, the short-lived outperformance in the Size factor waned. Adding additional support to this story, Quality has benefited from its relative overweight to the technology and healthcare sectors and significant underweight to financials while Profitability was strengthened in the second quarter by balance sheet accruals.”

Quality and Profitability Bias Perseveres Despite Q2 Risk Rally

Quality and Profitability leadership held strong through...

With the guidance and direction of FTSE Russell’s independent practitioner committees, FTSE Russell regularly consults the market on changes to the methodology of its indexes to ensure that the indexes continue to meet investors’ requirements and define and lead global standards in indexing. The proposals set out in the various consultation documents are included in order to gather valuable market feedback and may or may not result in changes to FTSE Russell methodologies.