Qontigo is planning to launch a suite of socially responsible investment (SRI) indices, which will be an extension of its environmental, social, and governance (ESG) ecosystem. The indices will feature more focused and KPI-driven ESG allocations. 

Currently, Qontigo has two main categories of index in this space—ESG Indices and ESG-X Indices. ESG Indices is overweight on companies with the highest ESG credentials, while ESG-X is a more focused set of indices that incorporate standard norm- and product-based exclusionary screenings, such as controversial weapons, thermal coal, and tobacco. 

Rick Chau, head of Asia Pacific for index and analytics at Qontigo, says the new SRI indices will be a more defined and optimized version of its current ESG indices. Once launched, they will allow Qontigo to cater to institutional investors at different stages of their ESG journeys. 

“So I believe going forward, we have to have a full ecosystem for not only our clients, but global investors in general. They want to not only talk or think about ESG, but [they want to understand] which part of the journey are they on with this ESG investment point of view—are they just starting, or at the point where they can actually start digging deeper and making sure that every single decision that they make resonates, not only with their own policies in their own philosophy internally, but with the actual clients that they’re engaging with as well,” he says. 

Consider a global dataset of 1,800 company names. For the ESG Indices, Qontigo will apply an ESG screening process and potentially end up with perhaps 900 to 1,000 names. ESG-X will be a smaller investment universe than that, and then SRI would be even smaller than ESG-X, Chau says, adding that the screening process is a lot stricter for ESG-X, and even more so for SRI. 

“We’ve found that a lot of the clients we’ve dealt with have said just looking at a company’s overall ESG score is not enough. We actually have to dig deeper. We have to determine and learn not only where they’re operating, how they’re operating, but also how much revenue they’re generating from these areas that they’re operating within,” he says. 

In terms of the methodology for the upcoming SRI indices, he says that Qontigo has applied tighter screens within each of the exclusions that it is looking to add within the SRI space. This could mean that, taking the global dataset of 1,800 names, Qontigo could potentially end up with about 500 to 600 names for the new index it is creating. 

From a methodology standpoint, Qontigo will apply its own caps on certain exclusions, on top of the United Nations Sustainable Development Goals (SDG), as well as the Principles for Responsible Investment (PRI). There are 17 SDGs, representing the UN’s blueprint for a more sustainable future. They address global challenges, including poverty, inequality, climate change, environmental degradation, peace, and justice. 

The PRI, on the other hand, is an international network of investors supported by the UN working to implement six principles for incorporating ESG issues into investment practices. 

“We want to look at the actual percentages within, for instance, the exclusions that we look at from a UN perspective. So if you’re looking at thermal coal, you’re looking at tobacco, you’re looking at gambling; while the terms themselves are there—for instance, there is no actual percentage exclusion amount that the UN stipulates—we’ve applied it ourselves. So taking power generation, for instance: we’ve applied a 25% cap, and within the tobacco space, we’ve applied a 5% cap. You cannot generate more than 5% of your revenue within this area. It has to be 5% or below. So that’s fairly extreme,” he says.

Chau says Qontigo has almost completed back-testing the SRI series and hopes to launch it in the next few months. “One of the biggest issues with launching these types of products is you need cornerstone investments in the funds at launch. We’re currently in discussions with both sides of the fence, if you will—the managers who will launch the funds, and the actual institutional investors that will actually put money into it. That is going to happen, it’s just a question of timing,” he says. 

The products are not available yet, but in the meantime, Qontigo has created some bespoke indices for asset managers that ask for tighter ESG screenings on the investible universe.