Analysis: Exchange operators embrace sustainable investing, with an eye on Biden

[December 08, 2020]  By John McCrank

NEW YORK (Reuters) - With money pouring in to assets linked to sustainable investing, exchange operators have increased their focus on Environmental, Social and Governance (ESG) business opportunities, which could get a boost from the policies of President-elect Joe Biden.

Exchanges have increasingly been rolling out new ESG initiatives, including data products to help investors understand ESG risks; services aimed at helping corporations analyze ESG best practices, disclose their own practices, and attract capital; and ESG-focused benchmarks and derivatives.

"Exchanges sit in this unique nexus in between investors and companies and regulators," said Evan Harvey, Nasdaq Inc's global head of sustainability. "And as all three of those groups are looking for the common sense ground on ESG reporting and transparency and performance measurement, exchanges have a role to play," he said.

Nasdaq expects ESG-related spending by U.S. companies to rise to $5 billion by 2025 from $500 million currently, and its executives said expanding ESG product offerings was a top business opportunity, during its investor day on Nov. 10.

The exchange operator has targeted $50 million in revenue from its new ESG services by 2025, versus $5 million now. That number rises to $150 million, or 5% of total revenue, when including all Nasdaq's ESG-related operations, like its governance platform, green bond platform, sustainable bond network, and ESG index platform, by 2025.

ESG has become big business for the investment industry. In U.S. equities, sustainable funds, which have outperformed standard funds, attracted inflows of $3.8 billion in the third quarter, compared with outflows of $118.5 billion overall for equity funds, according to Morningstar https://www.morningstar.com/
articles/1007284/us-investors-continue-to-endorse-sustainable-investing.

With a 16% compound annual growth rate, ESG-mandated assets could make up half of all managed U.S. assets by 2025, according Deloitte https://www2.deloitte.com/content/
dam/insights/us/articles/5073_Advancing-ESG-investing/DI_Advancing-ESG-investing_UK.pdf.

One tailwind for ESG could come from President-elect Biden, who made climate change a pillar of his election campaign.

Nasdaq is taking a wait-and-see approach on what the new administration will mean for ESG, Harvey said.

"Just the attitude around sustainable investing and what, if anything, the government is going to do," he said. "We're eagerly observing that along with everyone else."

A bull elk makes its way through the field as corn is harvested in Levan, Utah, October 5, 2013. REUTERS/Jim Urquhart/File Photo

Exchange operators Cboe Global Markets and New York Stock Exchange-owner Intercontinental Exchange Inc, also said they are curious as to how the Biden administration will treat ESG.

"The attention is there and it's growing and I wouldn't be surprised if it accelerates further as we move into a new administration and into the next Congress," said Angelo Evangelou, Cboe's chief policy officer.

While Biden will likely advocate for a renewed focus on ESG, it is unclear how that will play out for the market, said Lynn Martin, ICE's president of fixed income and data services.

"You still need to have organic demand from the market, and clearly, being able to generate returns helps with organic demand," she said.

Demand for ICE's green bond index has grown because green bonds have outperformed other forms of debt this year, she said.

That type of outperformance, along with more public companies backing carbon reduction and social and governance initiatives, has accelerated ESG's growth, along with things like the ESG data and hedging products ICE offers, she added.

In equities, the S&P 500 ESG Index is up 15.4% this year, topping a 13.7% rise by the S&P 500 Index. The ESG version excludes companies with low ESG scores, as well as firms manufacturing things like tobacco and controversial weapons like land mines and chemical weapons.

Cboe launched an options contract on the S&P 500 ESG Index in September investors can use to manage sustainability risks, access long or short positions and gain broad ESG exposure.

The company, like Nasdaq and ICE, also focuses internally on its own ESG metrics, Evangelou said.

"We like to walk the talk," he said.

(Reporting by John McCrank in New York; Editing by Megan Davies and Matthew Lewis)

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