Cathy Gibson, Global Head of Trading at Ninety One, explains why ‘green is good’ should apply to traders, as well as investors.
ESG has been the fastest growing sector of the asset management industry in recent years, driven by huge demand from investors. But the firms on which asset managers rely to execute investment decisions – banks, brokers and tech providers – are playing catch up.
A survey by market intelligence company Acuiti found that 83% of asset management firms – sometimes referred to as the ‘buy-side’ of the financial markets – consider a bank’s ESG credentials when considering which prime brokers to use. More than one in ten (11%) of those say ESG is “fundamental” to their choice.
However, while more than half (52%) of buy-side respondents agree their analyst, banking and broker providers – collectively, the ‘sell-side’ – understand their ESG requirements, only a quarter (26%) thought they were advancing ESG at an equivalent rate to them.
This matters, not least because sell-side analysts are one of the major players in capital markets. They provide recommendations and investment research to buy-side asset management firms and their portfolio managers.
If they are not integrating ESG factors into these recommendations – either because they lack the requisite data, systems and sustainable culture – then the success of ESG investing might be compromised.
There are broader questions too, including the energy efficiency of trading operations and the culture of trading, still associated with the ruthless ‘greed is good’ ethos of eighties films Wall Street and Trading Places, despite the electric trading revolution highlighted in Michael Lewis’s 2014 book ‘Flash Boys’.
Among the efforts from traders, brokers and banks to redress this imbalance is Sustainable Trading (ST).
Launched by former ITG and UBS Executive, Duncan Higgins, in February this year, ST is a non-profit membership network “dedicated to driving positive change on environmental, social and governance practices within the financial markets trading industry”.
By fostering collaboration among members that include asset managers, banks, brokers, exchanges and technology providers, ST says it is “mobilising the industry around a practical approach to ESG”.
The network is tasked with creating a “roadmap for long lasting change that delivers shared goals, shared opportunities, and shared values”.
Cathy Gibson, Global Head of Trading at ST founding member Ninety One, says: “The financial industry is very focused on the investment aspect of ESG, which is a critical starting place but it is just one aspect of how to understand ESG. The next logical step is to look at the infrastructure around how assets are held.”
Gibson says the idea of ST is to bring together different industry specialists to provide expertise on implementing sustainable best practices across the investment universe. Widespread implementation of these best practices by the industry will, she says, result in significant improvements within the financial trading industry.
“I can’t take on the entire investment industry, but I can start with trading because trading gets assets into portfolios. If traders are using the world’s dirtiest exchanges with the world’s dirtiest banks and using dirty technologies, that’s clearly not compatible ESG. ST is about experts formulating ESG best practices in their specialist area and sharing ideas.”
Gibson warns that unless collaboration is successful, the industry risk imposition of regulations which she says typically result in unintended consequences.
“Industry solutions are always optimal over regulatory [ones] because there are always unforeseen consequences. It is much better for industry to be sitting together and deciding what we think best practices are.”
There is already some evidence that organisations across the trading landscape are advancing their ESG offering.
London Stock Exchange Group, for example, says it “is pivoting squarely towards the green economy”. Its Green Economy Mark, launched in 2019, helps investors identify companies that make the majority of their revenues in green sectors. It is now planning an innovative initiative to direct funding to the voluntary carbon markets.
Across all pillars
The ST initiative is split across three steering committees covering the E, S and G pillars.
The environmental working group will assess the impact of building, operating and maintaining financial trading infrastructures, as well as identifying new approaches for power optimisation and energy efficiency.
In particular, the group will focus on data centre footprint, power consumption, cooling requirements and technology practices leading to energy use, associated carbon emissions and resource use.
ST points to the inefficiencies of trading servers that are configured for maximum performance, meaning they run at full power 24 hours a day. Given a full trading day is in the region for six to eight hours a day, systems are running at full power three to four times longer than necessary.
“It is entirely possible to reduce this waste by bringing user firms, hardware manufacturers and data centre operators together to identify more efficient approaches,” Gibson says.
In future, trading firms could, ST predicts, be measured on whether they purchase trading servers that have a high rating for the sustainability of their manufacture and are easily recyclable.
The social working group will focus on ethnic, gender and socio-economic diversity, employee wellbeing, engagement with communities and a stakeholder-oriented approach to management of businesses.
Gibson says: “There are lots of metrics around diversity and inclusion and we will be looking at those from a global standpoint. The goal is to find what [diversity] initiatives work; and which ones motivate people to join the industry and stay within it.”
She adds: “We are also looking at what we’re all doing to support employees’ mental health, and searching for a gold standard.”
Gibson argues that since diversity and inclusion and employee wellbeing are not likely to be factors in winning new business, competitors should be willing to share information.
The governance steering committee is concerned with taking care of clients’ confidential information and ensuring management is effective.
As ST puts it: “Best practices on decision-making, information security, compensation and risk management can be brought from the modern boardroom to the trading floor.”
More than a label
Gibson says the initiative is focused on defining and achieving best practice, and is not in the business of creating blacklists of organisations with which they will not work.
“This is not about saying we are not trading with certain partners. It is about asking where they are [on ESG], where do they want to get to and how will they get there. Best execution is paramount for our clients; do I think we can achieve that while still driving our industry and our trading function into a better space? Yes, I do. Absolutely.”
Gibson is clear that ST is still in its infancy, and declines to put a deadline on when the initiative will have best practice guidelines in place.
“It is more important that we get this right than we get it done by a certain time,” she says. “[ST] will be as successful as the members make it because it’s all about the contribution they make.”
Gibson is also adamant that members do not ST as a box-ticking exercise.
“This is not something that we want people to sign up to, then put a little sticker on the bottom of their presentation to say they are trading sustainably. That is not going to work. It is imperative trading plays a genuine part in moving the financial sector to be truly sustainable, and ST is important in achieving that.”