Setting out its three-year strategy this month, Euronext made a firm commitment that sustainable finance would be at its heart. 

The owner of six stock exchanges around Europe pledged to capitalise on the growing market for selling green bonds and to develop indices that respond to investor concerns about environmental, social and governance issues. 

For a fledgling business that accounts for just a small fraction of Euronext’s revenues, the promotion of ESG data and indices underscores how rapidly the issue has risen in top executives’ thinking. Stéphane Boujnah, chief executive, said asset managers no longer invested simply on the basis of yield and growth and were looking at corporate ethical standards. “The reality is that things have changed in terms of investors’ preferences,” he said. “As we are close to issuers we can play a role on this front. We want to be part of the standardisation of this new accounting language.” 

It is not alone. The London Stock Exchange has said it sees the ESG data it will inherit through its $27bn purchase of data and technology group Refinitiv as “a very attractive, very substantial” asset. Exchanges have begun to respond in earnest to investing that prioritises socially conscious issues, such as women’s empowerment or veganism. Investing in sustainable assets in five major markets hit $30.7tn at the start of 2018, up 34 per cent in two years, according to the Global Sustainable Investment Alliance. 

Simon Puleston Jones, chief executive of WokenUp, a social network devoted to social and environmental issues, said it was in part down to the arrival in adulthood of “Generation Z”, a socially-conscious consumer audience. “2019 is the year that times changed. ESG is driving a world of impact investing. Market infrastructure needs to be part of that. If you’re going to be a financial services company in the 2020s you’re going to have to respond to this trend,” said Mr Puleston Jones, who was formerly the head of trade association FIA Europe. 

This changing investor mindset is now being felt across global capital markets. Money market funds focused on ESG rose 15 per cent to $52bn during the first half of 2019, after growing just 1 per cent through all of 2018, according to Fitch Ratings, the credit rating agency. In August the Dutch bank ING introduced what it called the world’s first interest rate swap with a credit spread linked to improvements in sustainability. Derivatives markets operators are now gearing up with their own futures, which act as a way for asset managers to hedge against risks in their portfolios. 

Lynn Martin, head of data at Intercontinental Exchange, said it was incumbent on exchanges like ICE to provide the tools. “A transparent and liquid futures market allows other areas of the market to grow,” she said. 

But for all the rush of activity on some western exchanges, the journey is only in its infancy. “There is still no international convergence on a reporting format and standard” says Nandini Sukumar, chief executive of the World Federation of Exchanges. 

Investors remain sceptical over what they are investing in, or that tracking or trading an index will produce social change. “When it comes to derivatives and structured products, we need to define what ESG means in detail and then set standards. And we need to understand what investors demand from our industry,” says the Deutsche Derivate Verband, a markets association. 

Investors also need to be convinced that ESG-related funds can outperform standard benchmarks. So far the performance of ESG products has been inconclusive — some have outperformed standard indices, others have not. The concept has its critics: Cliff Asness, founder of AQR Asset Management, a US fund manager with $200bn in assets, has long argued that the concept of ESG investing is flawed and that pursuing virtuous causes should hurt returns as it requires screening out “sin stocks” like tobacco companies. 

As Mr Puleston Jones points out, “ESG products need to have a social purpose but they have also got to solve an economic problem”. For exchanges, the hard work is just beginning.

Page: Financial Times