Innovation in the fixed income ESG indexing space can be driven by the evolution and standardisation of the underlying data, Smadar Shulman, head of fixed income core and ESG indices at S&P Dow Jones Indices (SPDJI) has said.
Speaking to ETF Stream, Shulman said many challenges remain “downstream” when it comes to companies’ ESG data reporting, however, adding it is still one of the biggest growth areas for the industry with product lines consistently evolving.
“There are many different types of indices within the ESG space. Whether it is exclusionary or Paris-Aligned and Climate Transition Benchmarks, we see innovation happening,” Shulman said.
“Topics such as climate are also driven downstream by the ESG data itself, which is a particular issue for fixed income when you include publicly listed companies, private companies and even sovereigns.
“There is a lot of construction happening within fixed income which needs to respond to whatever investors goals may be.”
She added fixed income requires a much more nuanced approach compared to equities when it comes to analysing the data, including “processes and controls” to ensure it works for fixed income.
“One challenge is translating data into fixed income, because you have companies issuing debt across the corporate hierarchy,” Shulman said. “Making sure you can correctly apply that data to the issuer of the bond or security is something that is less of a challenge on the equity side.”
“Fixed income index providers such as ourselves have built processes and controls to make sure the application of ESG data works for fixed income,” she added.
Green and sovereign bonds
One big area of growth earmarked by Shulman is green social sustainability bonds, whose growing issuance is creating further opportunities for investors.
“This area is starting to appeal to some investors, she said. “We will continue to see further ideas and methodologies that seek to build on different goals.”
On squaring the sovereign ESG circle, Shulman added index providers are still “formulating an approach” with current indices mainly tilting overweight and underweight based on ESG risk ratings.
“There are different types of approaches and it will be interesting to see the evolution and the datasets underlying this,” she continued. “How you look at climate for corporates is very different to how you look at [climate for] sovereigns.”
“We have techniques to embed these using a rules-based transparent approach and we look to further innovate in the space.”
However, Shulman added it is important to innovate with a goal in mind as opposed to creating new indices for the sake of it.“It is important to understand with any index what the goal is, so any methodology is designed and constructed with that goal in mind.”
