ESG practices have been strongly in the spotlight of investors in the past year. If before the action was seen only as an idea, today it becomes more and more fundamental for companies. It was no accident that Citi developed a family of global ESG indices to help large funds when choosing assets and allocating resources, the so-called Citi World ESG Index.

The index, which is used in the international market, has just arrived in Brazil. The Citi World ESG Index tracks 300 selected stocks monthly.

A survey by Grant Thornton reinforces the importance of this news. The study heard about 5,000 entrepreneurs in 29 countries and found that, for 89% of respondents, ESG is important for business. In addition, more than 90% say that ESG practices can improve the image of companies. Of these, 43% agree and 48% strongly agree with this statement.

For Cosme Astarloa, director of Multi-asset Structuring at Citi Brasil, ESG practices have gained notoriety because people want their investments to have a positive impact on society. “This has been approaching the general public. There is also a quantitative issue, because we see that companies that have clear and concise ESG policies have less risk and a better return”, he says.

How it works

The Citi World ESG Index, according to Astarloa, was motivated by conversations with bank customers who had a demand for building ESG portfolios.

“We built the index with the aim of trying to create something innovative that surpassed those that existed until then. In addition, that would bring up the issue of new investments or that the components of the index were seeking within each sector, the best of them ”, says the director.

The Citi index tracks the companies on the MSCI World Index of Arabesque, a European company based in London that, in addition to being a data provider, is an Asset Management.

“Our differential is the partnership with the Arabesque data provider. The big issue with ESG today is that there is no standard and that has been one of the frustrations of many investors. What one data provider might consider a good rate, another might consider a bad rate. Since we are not the No. 1 ESG expert, we wanted to partner with a provider that has been investing in the area for over 15 years, ”he says.

To enter the MSCI World Index, stocks are filtered by liquidity and tradability. It also excludes tobacco, weapons or fossil fuel companies.

Then, the 40% best companies are selected, following the ESG criteria known as Score (the score) of the regional sectors, which consist of all the actions present in the MSCI World Index that belong to a specific geographic and sector region.

“Instead of choosing the best ratings in the entire stock universe, what we do is focus on the best ratings comparatively within each sector. For example, when we say that a company that has a 56 rating, whether it is good or bad, depends on how the industry average is. If it is 40 it is good, if the average is 65, this is a bad rating”, he says.

In Astarloa’s opinion, the advantage of having built an index is that it can deliver a solution according to customer demand.

“When we created this type of product, we thought about asset management customers as well as those who are individuals. What is cool about creating the index is that it is not a specific product, that is, we were able to structure different projects based on this index. For example, we can create an index fund, an ETF, a structured note and create a protected capital linked to it. There are several alternatives for investors to access, ”he says.

Another positive point raised by Asatrloa is that the index is able to verify companies that use ESG practices to gain more visibility without putting policies into practice.

“Today, not all companies publish and disseminate ESG data. Many use the practices as public relations, in order to have a positive impact. We had seen that many companies publicized this issue of policies because, somehow, they managed to pass the ESG filter just because they had the policy. We built this issue of monitoring their results and that’s where Arabesque’s Big Data is cool, that is, in addition to being able to see ideas, we also see execution in practice ”, he says.

With Big Data efforts, for example, Arabesque is able to verify whether a particular company is actually placing more women on the board of directors, among other policies.

By Luiz Felipe Simões, E-Invetidor – O Estado de São Paulo. Published on 03/24/2021.