Finvex benchmarks lead ethical/sustainable SP issuance

Independent Belgian consulting and index provider Finvex Group has been at the forefront of developments in the structured products SRI segment since December 2013 when it rolled out the first benchmark of its range of sustainable and efficient indices (Finvex Sustainable & Efficient Europe 30) which has now been deployed across 62 products sold in Austria (8), Belgium (18), Czech Republic (1), Finland (6), Germany (7), Ireland (8), Luxembourg (4), Portugal (1), Slovenia (1), Sweden (5), and Switzerland (1) and has sold more than €280m.

Shortly after, Finvex expanded the range with the launch of the Finvex Sustainable & Efficient World 30 in January 2014 via Ireland’s BCP Asset Management; and the Finvex Ethical & Efficient Europe 30 which was launched under a commercial agreement between the index provider and Societe Generale in the summer of 2014.

“We have an agreement with Finvex but we are always looking at new opportunities in the market and we have the flexibility to put partnerships together to bring value to investors,” says Klaus von Massenbach, cross-asset solutions, institutional sales and marketing for Austria and Germany at Societe Generale. “The potential for this kind of investment is there but the development of this segment depends on a number of factors.”

Northern European countries are more attracted by ethical investments and in some countries such as Sweden and Germany this kind of investment is not at all new, says Benedict Peeters chief executive & founder at Finvex adding that in other countries more needs to be done to educate investors.

“We work with partners on this kind of development including Sustainable Asset Management Group in Switzerland (which works directly with S&P DJI), Vigeo, an independent environmental, social and governance (ESG) rating agency, and indirectly via Forum Ethibel, an independent Belgian association that rates and audits ethical social responsibility metrics of corporations,” he says.

Finvex which also works with a German firm called Oekom, a provider of ethical and sustainable screening has noticed that smaller countries such as Belgium and Luxembourg where there is less appetite for the smaller domestic flagship indices are better positioned to channel investors’ interest to alternative ethical and sustainable underlyings than in France, for instance, where investors have a good national champion as the CAC 40, says Peeters.

“But we have also been very successful in the Nordics and in Switzerland,” he says. “The Netherlands is probably the country in Europe with the longest and most widespread sustainable investing culture but in some other countries there still is a long way to go.”

The trend around green bonds and ethical investments is not new, and before the crisis a significant portion of structured products sales were driven by products linked to theme-based underlyings. At that time the focus was only on providing access to interesting market segments, says Von Massenbach.

“Most of the companies in those indices were small cap so investors were effectively buying volatility,” he says. “Then the 2008 brought this whole area to a halt but the segment per se remains an interesting proposition for investors. This [part of the market] has traditionally been a focus for institutional investors and other investors such as churches or foundations have promoted the development from a sustainable approach to a more ethical approach.”

They key message is to convince investors that sustainable and ethical investments will not have a negative impact on their final returns, says Peeters who points that in the past investors were told there was not enough scope in this segment and that it would underperform because sustainability go to underperforming stocks.

“This has been proven wrong,” he says. “There is research that proves that sustainable stocks can deliver very good yields. This segment has also evolved and screening processes are also moving forward (inclusion, exclusion…).”

The indices developed by Finvex are different from other traditional sustainability indices such as the FTSE 4 Good where constituents are filtered according to qualifications and other factors.

“Finvex builds risk efficient portfolios, offering clients a better return potential,” says Von Massenbach. “The idea behind the two indices we have developed with Finvex is not only to have a couple of benchmarks that are sustainable and ethical, but to provide investors with two benchmarks that are risk efficient. The [selection of constituents] is based on Oekom’s approach, which is not based on a relative best-in class selection but [on a number of] requirements companies have to fulfil on absolute terms to make it to these indices.”

Finvex has plans to continue developing its range of ethical and sustainable underlyings not only from an index perspective but also from an asset management and an advisory point view as well, says Peeters.

“Our existing range is being reviewed constantly and we will add to it to cover other regions and other assets that can be included on an index,” he says. “SG is among the top issuers in the solutions to access the sustainable/ethical market and in the structured products market, and as a small firm partnering with one of the best houses in this business that has access to all-clients is an added value when promoting ethical and sustainable investments.”

Despite the potential of this segment of the market the main challenge is to convince and make a case for distributors to carry the products, according to Von Massenbach who stresses that unless an issuer has a significant proprietary distribution network issuers will always depend on the interest from those networks to carry these products.

“To make this kind of investment mainstream providers must put a lot of effort and time to promote them, and not all providers have the capabilities to develop this kind of range,” says Von Massenbach. “These underlyings need more time to be explained and don’t have the same traction as the traditional market cap indices (Eurostoxx 50…), but clearly from a private investors’ perspective these investments add value. In our view when you look at traditional and ethical investments together the later looks potentially more efficient as you get the full rewards for the risks you’re taking, and you’re not exposed to risks you’re not going to be rewarded for.”

Another challenge, says Von Massenbach, is to have a consistent offering so that a track record can be built to approach distributors and show them the benefits this products provide.

“This also applies to countries were these products are not getting as much exposure in the retail market,” he says. “Our plan is to continue building a sustainable/ethical range in Germany, Austria and Switzerland to replicate it in other markets at a later stage. We don’t think this area will be driving high sales but we hope they will be used as an alternative that can provide good returns on a risk efficient basis.”

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