Redefining Value 
in ESG
The Myriad of Paths to the Summit
Rebecca Healey

Redefining Value in ESG:  
The Myriad of Paths to the Summit
Capital markets are undergoing rapid change in terms of what investments are 
sought and how investments are made. In the first two reports1 in this series of 
three we looked at the role of market makers in supporting European capital 
markets and buy-side investors through the provision of liquidity. 
 
1	   https://wearemarketmakers.com/turning-the-tables-on-liquidity-provision-download-the-report/
 https://wearemarketmakers.com/liquidity-in-the-time-of-covid-download-the-report/
This third report focuses 
on: 
•	The impact Environmental, 
Social, and Governance 
(ESG) investing is having 
on the existing market 
structure landscape 
•	How buy-side firms are 
looking to make the 
necessary shift in assets 
under management 
•	The support asset 
managers will need to 
access accurate and 
relevant data, as well as 
liquidity, to make better 
informed decisions about 
ESG investments, whether 
direct in an underlying 
company or via indexes 
and alternatives 
To understand the situation today, and to assess the possible 
future of sustainable investing, we spoke to 35 industry 
participants including ESG specialists, portfolio managers 
and heads of trading at asset managers along with liquidity 
providers, exchanges and ESG data providers regarding the 
changes they are making to meet the new ESG demand and 
the opportunities that are being created as a result.
Redefining Value in ESG: The Myriad of Paths to the Summit
2

ESG 
underpins 
investment 
process
65%
Partially – 
dedicated ESG 
funds
35%
Exhibit 1
What proportion of your AUM is now 
subject to ESG investment criteria?
Executive Summary
Investor Demand Continues to Rise
65% of surveyed asset managers now embed ESG 
factors as part of their investment process across 
all funds; with just 35% of respondents only offering 
separated ESG funds (see Exhibit 1).
Increasing global regulation will require asset managers 
to reassess how investee companies, including the 
products and services they produce, are valued. It will 
also force buy side firms to review how they engage 
with their clients. An example is the recently announced 
extension of the European Sustainable Finance 
Disclosure Regulation (SFDR)2 to the Alternative 
Investment Fund Managers Directive (AIFMD), the 
Undertakings for Collective Investment in Transferable 
Securities Directive (UCITS) and Markets in Financial 
Instruments Directive II (MiFID) as well as incorporating 
the Circular Economy3. 
Reassessing Risk to Meet Demand
For asset managers, understanding exactly what 
investment you are making and with whom has never 
been more critical. In spite of regulatory efforts to 
provide objective clarity, sustainable investing – and 
the interpretation of what is “green” and therefore, by 
extension, what constitutes “greenwashing” – remains 
highly subjective.
Traditional risk management has focused on thematic 
fundamental bottom-up analysis. This, however, is 
labour and resource intensive and often backward 
looking – thus restricting the speed at which the 
industry can keep up with investor demand.
Historically, ore mainstream ESG policies have focused 
on green energy (such as Task Force on Climate-
related Financial Disclosures4) but as this moves into 
a greater focus on bio-diversity (Taskforce on Nature-
related Financial Disclosures5) it is clear that current 
exclusion policies need to be rewritten.
Subsidiary and supply chain risks are creating a web 
of complexity as investment strategies pivot away from 
commercial concerns to a greater focus on ethical and 
moral grounds.  
 
2	 Appendix 1
3	 https://www.wired-gov.net/wg/news.nsf/articles/
Circular+Economy+ Commission+proposes+new+consumer 
+rights+and+a+band+on+greenwashing+04042022132500
4	 https://www.fsb-tcfd.org/
5	 https://tnfd.global/
For example, the Russian invasion of Ukraine has 
led many global companies to close commercially 
successful operations in Russia.  
This complexity is increasing further as more 
ESG strategies become aligned with Sustainable 
Development Goals (SDGs) such as “zero hunger” 
(SDG #2), “quality education” (SDG #4), as well as 
“responsible consumption and production” (SDG #12).6 
These are harder concepts to measure and more 
subjective. 
As an ever-increasing number of economic sectors 
and geographical assets become caught up in a 
less favourable perception, liquidity risk and portfolio 
concentration may create unnecessary volatility, which 
can even lead to further de-investment in stressed 
market conditions. 
Consequentially, ESG as an investment strategy is 
becoming unwieldly to manage, particularly for global 
diverse portfolios with hundreds of names.
6	 https://sdgs.un.org/goals
Redefining Value in ESG: The Myriad of Paths to the Summit
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The Data Required to Reassess Risk 
Ultimately for investors, what matters most is the 
sustainability impact and outcome of the investment.  
Yet the ability to make properly informed decisions 
as to the suitability of an investment depends on 
access to information.  Our report demonstrates that 
both the provision of data as well as the means in 
which to extract relevant information need to improve 
if investors, and regulators, are to have greater 
confidence – not just in the underlying company but 
also in relation to any subsidiaries or supply chain risks. 
Currently ESG data is often provided by third-party 
data providers, which given the subjective nature of 
sustainable investing, may be misaligned with the 
investment strategy of a particular fund.  Furthermore, 
the data is often incomplete, possibly inaccurate and 
largely backward looking. Where current ESG data 
is licensed to asset managers, it typically will not be 
company-level data. Most market data contracts only 
allow for summary portfolio level or sector/country 
breakdowns to be shared. 
If the full data picture of the investee company’s activity 
is not available, accurate analysis cannot be conducted 
on the investment in question - let alone any subsidiary 
or supply chain activity. In addition, different data 
vendors make different assumptions which lead to 
different conclusions, making peer to peer company 
comparisons meaningless. 
Redefining Value in ESG: The Myriad of Paths to the Summit
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Exhibit 2
The Path Ahead
The cost of obtaining relevant data and the difficulty in 
managing data will only continue to accelerate for firms 
as ESG investing becomes mainstream. Investing will 
move away from the concept of “value” being based on 
profit and loss to how a company’s product or service 
positively or negatively impacts society and therefore 
whether it is “sustainable” as an investment.
Access to relevant, more accurate and granular 
data regarding the underlying investee companies 
(including subsidiaries and supply chains) will be at 
the core of improving the efficiency and effectiveness 
of sustainable investing. Buy-side firms are already 
using data from multiple providers. Filtering it to the 
appropriate level – and adding their own understanding 
of a company’s sustainability credentials relative to the 
investment strategy in question – will only enrich their 
decision-making process.
Rather than benchmarking, a taxonomy (with a small 
“t”) that recognises multiple routes to reach the 
outcomes, together with a central depository of direct 
company disclosure reporting, according to existing 
industry frameworks such as ISO and TCFD/TNFD, 
could provide a more effective approach in furnishing 
asset managers with the information they need (see 
Exhibit 2).
Through systems of systems to manage the extraction 
of relevant data for the investment strategy in question, 
including the possible adoption of blockchain and DLT 
in smart contracts, investors could access data in a 
more timely manner, not just relating to the company 
but their activity globally including subsidiaries an 
supply chains. For example, an investor can take a 
view that an electric car maker is a “good” sustainable 
investment but understanding more about the source 
of the necessary lithium or the longevity of the battery, 
can influence whether the relevant investment criteria 
are still being met.
Once the investment decision is made and executed 
whether that is to buy a new issuance, secondary 
market shares, bonds or specific ESG related products 
— the ecological impact can then be tracked over the 
lifetime of the investment.  While data is needed at the 
point of trade, either to inform selection of products 
or a broker to complete at transaction - ongoing data 
is required whilst the investment is held to allow for a 
constant reassessment of risk.
The concept of “value” is slowly being radically 
redefined for a sustainable world. This will have a 
profound impact on capital markets, the investments 
made, by whom and in what manner. As an industry 
we are just at the start of a long and arduous – if 
worthwhile – route to a sustainable summit.
Redefining Value in ESG: The Path Ahead
5

Contents
Redefining Value in ESG:                                                                                                           
The Myriad of Paths to the Summit	
2
Executive Summary                                                                                                                       3
Investor Demand Continues to Rise                                                                                                                                3
Reassuring Risk to Meet Demand	
3
The Data Required to Reassess Risk                                                                                                                              4
The Path Ahead	
5
Managing ESG Today for the Risks of Tomorrow	
10
From Xinjiang to Ukraine – Rethinking Exclusion	
10
Exclusion Plus	
12
ESG is Dead, Long Live Sustainability                                                                                                                          13
Understanding the Hidden Costs of Greening Portfolios	
14
Alternative ESG Products	
16
The Positives	
17
The Challengers	
18
ETF to ETD	
20
Big Short Mark II                                                                                                                          21
The Data Path Ahead	
24
Looking Forward  	
26
Appendices 	
27
Appendix 1 – Articles 8 and 9 of SFDR	
27
Appendix 2 – SFDR extended to MiFID II 	
28
Appendix 3 – United Nations Sustainable Development Goals (SDGs)	
29
Appendix 4 – US Regulation                                                                                                                                        30
Appendix 5 – Rise in Exchange Based ESG Products	
30
Appendix 6 – Current ISO Standards being used in Financial Services /Sustainability  	
31

Managing ESG Today for the Risks of Tomorrow
“Exclusion policies are too much 
of a blunt tool – you need to 
have a better understanding 
of the investment strategy and 
the company in question …. 
A better outcome would be 
for me to invest in a company 
with a low ESG score today but 
with the objective of becoming 
a good ESG performer in the 
future – what happens to those 
that are excluded from indices?”
Head of Sustainability, 
Large Global Asset Manager 
The ESG debate is no longer whether sustainable 
investments are needed but rather how best to manage 
the shift in investor appetite in the most effective 
and least volatile manner. Any change in investment 
effects the entire capital markets chain from listings to 
execution to clearing, and the industry itself is already 
taking direct action – from the creation of new specific 
products such as Natural Asset Companies7 to the 
post-trade space, where clearing firms are opting  
to no longer accept Palm Oil Futures8.
7	   https://www.nyse.com/introducing-natural-asset-companies
8	   https://www.abnamro.com/clearing/en/product/sustainabilit
Redefining Value in ESG: The Myriad of Paths to the Summit
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Exhibit 3
The increasing perceived complexity of ESG is leading 
some asset managers to call for a more sustainable 
investment approach which would support companies 
looking to transition from “brown” to “green”. 
Companies that may not meet the criteria for green 
bonds can still issue sustainability-linked bonds where 
the interest rate on the bonds decline the closer the 
companies get to reaching their target reduction in 
carbon emissions. 
And there is growing appetite for a more pragmatic 
approach, with the EU Council agreeing to include 
nuclear energy and natural gas as “green” investments9. 
While the EU Commission initially proposed 100% 
alignment with the EU Taxonomy, this has been watered 
down to include a 20% “flexibility pocket”.
Managing ESG Today for the Risks of Tomorrow
0
50
100
150
2018
2019
2020
2021
2022
$bn
Source: Financial Times / Institute of International Finance
ESG Fund Flows 2018 - Q1 2022
Mixed allocation funds
Equity funds
Fixed-income funds
4-quarter moving avg
9   https://www.consilium.europa.eu/en/press/press-releases/2022/04/13/sustainable-finance-council-agrees-its-position-on-european-green-bonds/
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
“We are fossil free, so we don’t 
trade anything in that space.  
The non ESG sectors, we’re 
more or less out of them, 
unless you can call it a ‘brown’ 
company that’s on its way to be 
green.” 
Mid-sized EEA Asset Manager
Redefining Value in ESG: The Myriad of Paths to the Summit
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Managing ESG Today for the Risks of Tomorrow
As ESG as an investment process moves away from 
an overly simplistic focus on “environmental issues” 
to includer broader factors relating to the future 
sustainability of the global economy, there are three 
challenges emerging:  
•	 Firstly, a greater number of factors will need 
to be considerered in relation to the future 
sustainability of the investment. These include 
wider environmental issues, such as nature and 
biodiversity, as well as social and governance 
issues, diversity and inclusion, the living wage 
and fair taxation. The investment decision will not 
only be about a company’s carbon footprint but 
increasingly about the company’s positive impact 
on future society. 
•	 Secondly, the more sustainability factors involved in 
a decision, the more comprehensive is the required 
understanding of the interdependencies of all the 
elements of the investee company, its subsidiary 
and supply chains.
•	 Thirdly, the concept of “value” will need to 
change from a sole focus on the bottom line or a 
company’s ability to manage future environment 
risks, to a broader consideration of companies who 
have a positive impact on the UN Sustainability 
Goals (see appendix 3).
Redefining Value in ESG: The Myriad of Paths to the Summit
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Managing ESG Today for the Risks of Tomorrow
From Xinjiang to Ukraine – Rethinking Exclusion
According to the CEO of Norges, one of Europe’s 
largest institutional investors, firms that fail to 
acknowledge the level of change required in how they 
operate will “face a world in which financing will dry 
up, insurance companies will walk away, employees 
will defect, social media shaming will intensify, and 
customers will disappear”10.
Meeting the speed of adoption as individuals look for 
investments which benefit people and the planet as well 
as, and sometimes ahead of profit, is only matched by 
the rising level of regulatory scrutiny. 
But the definition of a “green” or “brown” investment 
varies from one fund to another, one manager 
to another, and one end investor to another. 
Understanding what exactly an investee company does, 
who it employs and how it treats them and in what 
way it conducts business with its entire supply chain 
will continue to redefine investment evaluations as the 
concept of “value” is redefined.
Historically, ESG investing was, in the main, based on 
the exclusion of potential areas of economic concern 
like cluster munitions and tobacco, followed by 
supporting companies which were making the transition 
to a sustainable economic model such as energy 
companies investing in renewables. However, both the 
scope and the speed at which the investment industry 
needs to adapt to a changing context is escalating.
The industry has been adjusting to rising public concern 
regarding climate change after the recent record-
breaking floods11 and wildfires12 across Europe in 2021. 
At the same time, the public mood for stricter regulation 
over the use of forced labour in China’s Xinjiang 
region has shifted. Now, with the atrocities in Ukraine 
following the Russian invasion, assumptions about 
what should or should not be excluded from ESG are 
being called into question further still. “Good” defence 
companies which abide by international treaties on the 
development and sale of weapons including stepping 
up end-use monitoring of equipment13 are now being 
discussed as eligible ESG investments.
On the other hand, there is increasing recognition of 
the environmental cost of making batteries for electric 
cars, including the use of raw materials mined in 
potentially dubious circumstances. Moral questions can 
also arise as to an investor’s view of alcohol or adult 
entertainment. This creates further subjectivity over 
investment decisions. 
Ultimately what matters most is how investors are 
defining their ESG investment strategy criteria and 
whether those investment objectives are being met.
“Barely a year after Sweden’s 
SEB bank adopted a new 
sustainability policy that 
excluded defence stocks from 
its funds, the group has made  
a U-turn. SEB says it began to 
review its position in January 
as a result of ‘the serious 
security situation and growing 
geopolitical tensions in recent 
months’ which culminated with 
Russia’s invasion of Ukraine.” 
Financial Times, March 9 2022
10	   https://www.bloomberg.com/news/articles/2021-12-06/esg-duds-have-nowhere-to-hide-world-s-biggest-stock-owner-says?sref=12wgA5jj
11   https://www.worldweatherattribution.org/wp-content/uploads/Scientific-report-Western-Europe-floods-2021-attribution.pdf
12	   https://ec.europa.eu/commission/presscorner/detail/en/ip_21_5627
13	   https://www.ft.com/content/c4dafe6a-2c95-4352-ab88-c4e3cdb60bba?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-
9208a9e233c8#myft:notification:daily-email:content
Redefining Value in ESG: The Myriad of Paths to the Summit
10

“You have a base list of 
exclusions that clients will have 
zero tolerance to - cluster 
munitions, weaponry, tobacco. 
That could morph into alcohol, 
nuclear power, fossil fules, 
cannabis. It’s making sure we are 
aware of exactly what is in the 
product, but also what liquidity 
risk there is, given the increasing 
risk of portfolio concentration 
from the investments you have 
excluded.” 
Mid-sized EU Asset Manager
Managing ESG Today for the Risks of Tomorrow
Exclusion Plus
For over half of the respondents, exclusion policies 
are often the default way to minimise the risks of 
greenwashing, However, this approach is fast becoming 
seen as just the first step in assessing the level of 
ESG risk (see Exhibit 4). With ESG negative screening 
representing over 60% of all existing fund strategies in 
Europe (Exhibit 5), the challenge of accurately assessing 
the level of ESG risk using exclusion is only likely to 
increase. This is especially the case because risks are 
no longer limited to just the company itself. 
 
In addition to the scope extention of European 
regulation, we see even stronger requirements 
emerging. For example, Germany approved a law on 
due diligence to enforce the protection of human and 
environmental standards in supply chains globally. Fines 
for non-compliance could rise to 2% of average annual 
sales for companies with €400m in sales14 making the 
issue not just a moral concern but also a financial one. 
Exhibit 4
How are you managing new “hidden” risks within 
portfolios?
Exclusion Plus Risk Management
Exclusion Lists Only
Moving to Specific ESG Products
55%
31%
12%
Geographic share of negative screening  
strategies
5 10 15 20 25 30 35 40 45 50 55 60 65
Australia
Canada
Japan
US
Europe
Source: Redlap Consulting / Financial Times
%
Exhibit 5
14	   https://erma.cc/8JUX-ET2Q
Redefining Value in ESG: The Myriad of Paths to the Summit
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Managing ESG Today for the Risks of Tomorrow
Exhibit 6
The Difference in Sustainable Finance Investment Strategies
II solves global 
challenges 
by investing 
in companies 
developing 
solutions to those 
challenges
RI involves including 
ESG information in 
investment decision-
making, to ensure that 
all relevant factors are 
accounted for when 
assessing risk and 
return
SRI actively 
excludes 
investment 
involved in 
harming our 
planet based on 
specific ethical 
guidelines
SI refers to 
investment in 
themes or assets 
specifically related 
to the sustainability 
of individual 
companies in a 
carbon neutral 
world
ESG includes the 
consideration of 
environmental, 
social and 
governance 
factors alongside 
financial factors 
in the investment 
decision-making 
process
ESG is Dead, Long Live Sustainability
The reality is that ESG investment strategies come in 
many guises (see Exhibit 6). The way investors define 
their investment strategy to reach their sustainable 
investing goals needs to change to focus on the overall 
sustainable investment outcome rather than the name 
of the investment strategy.
As investing moves across the “green” spectrum, 
complexity increases and expectations grow. 
Some funds exclude fossil fuels, some don’t. 
There is an argument that excluding investable assets to 
only a handful of names will neither assist the transition 
to a sustainable economy, nor support investor needs. 
To encourage more companies to invest sustainably, 
there are portfolio managers who deliberately select 
a fossil fuel company that is performing poorly on 
ESG ratings today, because they are confident their 
engagement with the company will lead to a higher ESG 
rating in the future, making it a good investment.
“There is not one single version 
of ESG; some want to exclude 
bad sectors, some are selecting 
ESG companies as they believe 
they are better run and will 
deliver better returns – one 
person’s green fund is another’s 
greenwashing.”
Mid-sized UK Asset Manager
“For us it is all about: does the 
investment do good? For some 
asset managers, unless the 
company already has a high ESG 
score, they are unable to make 
the investment which makes it 
harder for us to raise funds to do 
good. ESG is becoming a victim 
of its success.”
Small EEA Asset Manager
Redefining Value in ESG: The Myriad of Paths to the Summit
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Managing ESG Today for the Risks of Tomorrow
Understanding the Hidden Costs of Greening Portfolios
Using exclusion policies to meet compliance concerns 
regarding greenwashing also increases the risk of a 
liquidity squeeze resulting from a reduced investable 
universe. A gargantuan task is awaiting asset managers 
who must review every name they hold to make their 
portfolios ESG-friendly. 
Forthcoming amendments to MiFID II legislation 
will include suitability requirements and changes to 
integrate sustainability factors, risk and preferences into 
organisational requirements and operating conditions 
for investment firms15 (see Appendix 2). There is 
concern that firms will group Article 816 funds together 
with impact and other sustainability funds, increasing 
the risk of greenwashing given the difficulty in accurately 
assessing future sustainability risk. 
Some jurisdictions such as Finland, UK, France 
and Singapore are beginning to pass regulations to 
specifically address greenwashing in this area. Crucially 
for capital markets sustainable evaluations have in the 
main been focused on the effects that the environment 
was having on the portfolio, but NOT what the 
investment/organization was doing that impacted the 
environment – and this is about to change. 
New regulatory requirements under Scope 1, 2 and 
3 emissions increases the complexity of managing 
multiple fund structures across numerous portfolios; 
with Scope 3 emissions relating to a company’s supply 
chain, which can represent anything from 65 to 90% 
of all emissions (see Exhibit 7)17. Rather than just 
looking at shareholder profit, companies now need to 
demonstrate their planetary and social footprint. 
While there is a need to calculate greenhouse gas 
emissions (GHG) from the entire value chain, the 
presence of standardized verifiable method for 
determining Scope 3 emissions remains elusive. 
Yet as more companies opt to promote their Scope 
3 credentials, boards are recognising their need to 
address Scope 3 to survive. Most notably impacting 
finance, with the Gfanz agreement18 including making 
financial services firms accountable for the Scope 3 
emissions of their clients.
Exhibit 7
“We have re-labelled a lot  
of our funds and we are going  
to label more. There is a big 
project ongoing to integrate 
ESG as part of our entire 
investment process.”
Mid-sized European Asset Manager
Source: Redlap Consulting
1
2
3
Scope 1, 2, 3 Emissions
Core business
Indirectly generated through 
energy purchases 
Indirectly created by the company’s 
supply chain 
15   https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/sustainability-related-disclosure-financial-services-sector_en
16	   https://www.carbontrust.com/
17	   https://www.gfanzero.com/
18	   https://www.gfanzero.com/
Redefining Value in ESG: The Myriad of Paths to the Summit
13

Managing ESG Today for the Risks of Tomorrow
Without accurate information on the underlying 
company and a standardised means by which to 
make a valued assessment, compliance departments 
may err on the side of caution. This could result in the 
exclusion of potentially risky assets to avoid inadvertent 
greenwashing.19 
As more assets become perceived as “unsustainable” in 
the long-term, entering or exiting an investment strategy 
will become increasingly challenging and market timing 
will be critical. 
By relying on traditional sell-side relationships to access 
liquidity for their ESG investing, asset managers may 
not be accessing the best liquidity available. This could 
impact their best execution obligations (see Exhibit 8). 
Using third-party data providers for investment strategy 
purposes frees up execution strategies to select the 
most appropriate liquidity available. This is only likely 
to increase in significance as sustainable investing 
becomes more crowded.
Exhibit 8
How are you sourcing liquidity  
for ESG funds?
No change – rely on traditional sell-side 
relationships
Third party data providers
ESG specialist providers
83%
30%
9%
Source: Redlap Consulting
“ESG is now creeping into 
the broker selection process. 
A number of US Pension 
Funds now require us to trade 
with WMB (women minority 
brokers).”
Head of Trading, Small US Buy-Side
19   The definition of greenwashing under ISO Standard 14100 equates to false or misleading information, either intentionally or inadvertently, regarding the  
        environmental or sustainability attributes of a product, asset, and activity, which can have consequences on the assessment of financial and non-financial  
        materiality.
Redefining Value in ESG: The Myriad of Paths to the Summit
14

With more evidence now required from the  
buy-side to demonstrate how they are integrating 
sustainability factors in their investments, understanding 
how to green portfolios in the future will be critical.  
The challenge for asset managers is multi-faceted. 
ESG was traditionally seen as the bedrock of successful 
active fund management. By conducting bottom-up 
research and engaging directly with companies, active 
managers have a better understanding of a company’s 
future risks and opportunities. 
However, the level of understanding that is now required 
of a company, subsidiaries and supply chains, means 
that in-depth analysis and monitoring only works well for 
asset managers with a limited number of holdings. The 
situations becomes much more complex for a portfolio 
manager with hundreds of names to manage. 
Specific sustainable (index) products are increasingly 
being seen as a means of offering liquid and cost-
efficient alternatives to asset managers. These can 
help mitigate sustainability risk while providing investors 
with exposure to “green” products. Sell-side liquidity 
providers who service both retail and institutional 
investor flows, with highly automated risk books and 
sophisticated modelling, can help reduce unnecessary 
risk by providing liquidity in specific sustainable 
products.
Yet ESG Exchange Traded Funds (ETFs) continue 
to be seen by many asset managers as securities 
predominantly used by passive managers to lower the 
cost of ESG investing. As investors’ demand continues 
to increase for more sustainable investments, ETFs 
combined with active management could be used as a 
first line of defence against greenwashing by weeding 
out initial controversies. 
However, exclusion alone in an index raises questions 
as to: 
a.	 How firms are able to invest successfully in the 
firms of the future, and 
b.	 Whether the rating agencies that provide the 
benchmarks are sufficiently robust. Although these 
are set to change given the intended regulatory 
focus on sustainability benchmarks.
Alternative ESG Products
“If you are focused purely on 
exclusion, you are creating an 
ever-decreasing circle of names 
that you can invest in”
Medium sized EU Asset Manager
“With automated pricing of risk, 
you can much more effectively 
price that risk, which increases 
your access to liquidity. With a 
basket of 100 securities, 10 are 
extremely illiquid. We can use 
a subset maybe of the 25 most 
liquid securities to qualify for our 
risk, and a short time horizon 
without having to touch 10 
illiquid securities.”
ESG ETF Market Maker 
Redefining Value in ESG: The Myriad of Paths to the Summit
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Alternative ESG Products
The Positives
•	
With massive discounts and premiums to NAV, 
Exchange Traded Funds (ETFs) are viewed as a 
fast practical solution to the vast sums of passive 
money looking to switch to green investments. 
•	
ETFs can provide diversified and cost-effective 
exposure to a broad basket of securities via  
a single transaction. 
•	
The underlying securities can be traded on a very 
specific time horizon to limit the impact of pricing 
individual instruments, such as the close, where  
liquidity formation is at the highest. 
•	
ETFs can offer a more accurate indicator of fair 
pricing as well as create liquidity in ETF names.
•	
ETFs can also reduce the overall ESG inventory 
requirement by netting buys and sells in an end of  
day transaction. 
“The policy starts off with what the client objectives are, then what 
the voting engagement should be, including the active PM - they 
have the in-depth knowledge of the company to justify the voting 
position. You can’t justify a voting position just on the benchmark. 
Step two is looking at the underlying benchmark. Exclude the 
worst offenders - weapons, thermal coal, oil, tobacco - and you tilt 
the index to those companies who are doing most to improve their 
ESG momentum.”
Head of Trading, Large Global Asset Manager 
Redefining Value in ESG: The Myriad of Paths to the Summit
16

Alternative ESG Products
The Challenges
•	
Investors are asking questions about the content 
of some ETF indices given recent exposes on 
perceived questionable ratings. There are inherent 
risks with tracking an index based on exclusions. 
For example, it may become too complex to 
manage by incentivising a minority universe of 
investible companies which creates liquidity risk. 
•	
Some ETFs have become a victim of their own 
success. Vast unmanageable inflows with over-
inflated valuations and high portfolio concentration 
force re-benchmarking the index construction, 
unwinding positions and reinvestment regardless of 
market conditions20.
•	
Different interpretations as to what ESG means lead 
to diverging views as to which assets should or 
should not be included in a fund or benchmark. 
•	
For example, a widely marketed Clean Energy ETF 
was found to include fossil fuel companies such 
as Gazprom, Lukoil, or MOL Group21. For asset 
managers with fossil fuels on their exclusion list, 
the presence of such companies in the ETF may be 
contrary to their sustainable investment policy. This 
situation could also be viewed as greenwashing 
and presents a risk fewer and fewer firms are willing 
to take today. 
“The issue isn’t the use of  
ETFs – it’s the lack of liquidity in 
secondary markets. Two-thirds 
of the liquidity is locked up in 
upstairs trading with a handful 
of market participants, that 
increases the likelihood  
of volatility.”
Head of Trading, Large Global Asset Manager 
“ESG is often backward looking, 
avoiding doing the bad stuff, 
rather than focusing on investing 
in the companies of the future – 
tracking an index isn’t going to 
deliver that.”
Head of Sustainabiity  
UK Mid-sized Asset Manager
20	   https://www.nyse.com/introducing-natural-asset-companies
21	   https://www.ishares.com/us/products/312222/ishares-esg-msci-em-leaders-etf-fund
Redefining Value in ESG: The Myriad of Paths to the Summit
17

Alternative ESG Products
A lack of understanding of the difference between 
environmental impacts and the effects that 
organisations are experiencing could undermine trust in 
the market, with grave consequences.
To address these concerns, ESG ETFs will need to re-
assess risk exposure by including underlying investor 
objectives in order to assess the benchmark. 
Once the worst offenders are excluded, companies 
doing the most to improve can be overlaid. This would 
overweight the leaders and underweight the laggards. 
After that, depending on investor appetite, other factors, 
such as SRI, can be taken into consideration. 
This more in-depth approach may be the best way to 
address recent research findings which suggest many 
ESG ETFs actually have a higher carbon footprint than 
the S&P500 when using emissions data disclosed 
by companies22. For example, with soybeans now 
recognised as the second-largest driver of deforestation 
in tropical countries after cattle, ETF indices also hold 
380 publicly-listed companies linked to deforestation23. 
So, whether such companies should be included in an 
ESG ETF or not depends on if the investment strategy 
focuses on how, if at all, the underlying companies are 
taking action to address negative sustainable behaviour.
“The future will be tailored ETFs. 
The product is already available 
in the US, where instead of 
tracking an index you can create 
a bespoke portfolio designed 
to meet your individual ESG 
criteria. That can be sector 
or individual company based 
– incorporated into the ETF 
is directly tradable underlying 
assets – you avoid the locked 
up liquidity and you have deep 
secondary market trading.”
Head of Trading, Large Global Asset Manager 
22	   https://qz.com/2105647/the-problem-with-esg-investing-in-one-chart/
23	   https://planet-tracker.org/planet-tracker-names-the-seven-companies-critical-to-tackling-etf-deforestation-risk/
Redefining Value in ESG: The Myriad of Paths to the Summit
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Alternative ESG Products
ETF to ETD
Despite the recent growth of ESG linked products, ESG 
ETFs or ESG Exchange Traded Derivatives (ETDs), only 
42% of respondents so far are changing their asset mix 
to gain greater sustainable exposure (see Exhibit 9). 
However, that may be about to change. 
Many exchanges are now offering green products in a 
bid to facilitate the green transition (see Appendix 4). 
Eurex has established ESG versions of main European 
benchmarks including STOXX, MSCI, DAX 50 ESG, 
Euro STOXX 50 ESG24. Nasdaq is also looking at 
expanding its ESG derivatives offering by launching 
option contracts on the OMX Stockholm 30 ESG 
index25.
Moving investments to ESG derivatives remains 
hampered by fund restrictions which prevent the use 
of derivatives. Yet, derivatives could play a critical role 
in supporting the transition. They not only provide the 
means to hedge against the impact of climate-related 
events on investments, but also help the buy-side 
manage risks related to inflows and outflows. This is 
because they enable going long or shorting ESG futures 
within the necessary level of ESG exposure. 
Even if asset managers can use derivatives to manage 
their exposure and hedge their risks as part of their fund 
mandate, the general lack of awareness around existing 
ESG derivatives means that asset managers may tend 
to revert to more traditional benchmarks for the time 
being. 
This could change with the arrival of new smart 
contracts which could authenticate where metal is 
sourced as well as track the shipment. Smart contracts 
can also monitor customers’ market positions in 
real time to ensure there is sufficient collateral to 
cover trades. This would also avoid unnecessary 
market volatility as electronic trading algorithms can 
automatically reduce and rebalance customer positions, 
making situations such as the recent intervention by the 
London Metal Exchange (LME) unnecessary26.
“It is changing our mix of the 
assets we trade because our 
strategy direction will evolve to 
become more ESG friendly. That 
impacts our risk management 
framework, hedging positions 
and our portfolio management 
services. We are not really 
moving into the ETF space 
because we also have the 
internal team to assess each 
instrument so this doesn’t mean 
we have to buy ETF, we can 
buy the underlying asset of the 
component of ETF.”
Mid-sized EEA Asset Manager
Exhibit 9
How has your asset mix changed?
Source: Redlap Consulting
Focus on 
equity/bond
58%
Incorporating 
ESG products
42%
24	   https://www.eurex.com/ex-en/markets/idx/Equity-and-Index-ESG-Derivatives
25	   https://www.eurex.com/ex-en/markets/idx/Equity-and-Index-ESG-Derivatives
25	   https://www.ft.com/content/3a4748f7-f47e-4891-95be-377561666b48
Redefining Value in ESG: The Myriad of Paths to the Summit
19

To meet the speed of investor interest, regulators 
are increasing their scrutiny to ensure end investors 
are aware of what they are investing in. However, in 
a similar manner to the mortgage backed securities 
issue that preceeded the global financial crisis of 
2008, when rating agencies were enmeshed with the 
American Mortgage Loan Market and Credit Default 
Swaps market, ESG investments are often inherently 
tied to ESG ratings. Yet it is becoming increasingly clear 
that current labels are not always able to guarantee 
ESG claims. This may not always be deliberate but 
many global conglomerates have multiple operations 
in multiple jurisdictions and information on company 
activies is not always easy to obtain. Bloomberg 
Intelligence estimates that 60% of all the money retail 
investors have ploughed into sustainable or ESG funds 
globally has gone into those reliant on just one rating 
agency - MSCI27. 
This is leading to concerns from some regulators such 
as the AMF28 and other authorities such as the Bank of 
International Settlements29. The reliance on ESG ratings 
providers to highlight investment risk and the extension 
of the regulatory risk to subsidiary and supply chains 
raises the stakes further still. As a result, rating agencies 
are coming under increasing scrutiny concerning how 
individual investee companies are scored. For example, 
a “water stress” score for a chemical company does not 
include the impact it has on the local community but 
whether there is sufficient water access to produce the 
chemicals.
Big Short Mark II 
“This is inflating bubble territory 
- I cannot believe our industry 
has not learnt anything from the 
dot com bubble. We are about 
to create another bubble all over 
again.”
“90% of the stocks in the S&P 
500 have wound up in ESG 
funds built on MSCI’s ratings. 
What does sustainable mean 
if it applies to almost every 
company in a representative 
sample of the U.S. economy?”
Bloomberg Intelligence
27	   https://www.bloomberg.com/graphics/2021-what-is-esg-investing-msci-ratings-focus-on-corporate-bottom-line/
28	   https://www.amf-france.org/en/news-publications/publications/reports-research-and-analysis/market-impact-rating-agencies-decisions
29	   https://www.bis.org/publ/qtrpdf/r_qt2109.pd
Redefining Value in ESG: The Myriad of Paths to the Summit
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Europe is ramping up its regulatory arsenal to tackle 
supposed ESG “greenwashing” with the introduction 
of the EU Taxonomy30. This aims to establish a 
classification system of environmentally sustainable 
activities and includes a recent call for evidence by 
ESMA on the use of ESG Ratings31. 
The EU has also implemented SFDR32 which requires 
asset managers to evidence how they are integrating 
ESG factors. The EU also extended this into MiFID II 
organisational requirements including suitability and 
risk management assessments, conflicts and product 
governance arrangements (see Appendix 1 and 2). The 
Corporate Sustainability Reporting Directive (CSRD)33  
will increase the number and scope of companies 
subject to non-financial disclosures. The extension to 
the circular economy will encapsulate cybersecurity 
policies and governance structures as well as the 
right to repair. Consumer electronics and IT will be the 
sectors most impacted by policy initiatives to reduce 
waste and pollution through adoption of more circular 
economy initiatives34.
Similarly, the UK is looking to expand company 
sustainability disclosures. The FCA has released 
its proposals for additional disclosures for asset 
managers35 consistent with the Task Force on Climate-
related Financial Disclosures (TCFD) in terms of how 
climate-related risks are taken into consideration both 
at an entity level and a product and portfolio level. 
These disclosures are soon to be followed by the Task 
Force on Nature-related Financial Disclosures (TNFD)36  
designed to increase transparency on how firms are 
managing biodiversity-related risks alongside climate 
risk. 
Big Short Mark II 
30   https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
31	   https://www.esma.europa.eu/press-news/esma-news/esma-launches-call-evidence-esg-ratings
32	   https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32019R2088
33   https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
34	   https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12511-Environmental-performance-of-products-&-businesses-substantiating-claims_
        en
35	   https://www.fca.org.uk/publication/policy/ps21-24.pdf
36	   https://tnfd.global/
Redefining Value in ESG: The Myriad of Paths to the Summit
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The US is also developing its own frameworks for 
climate-related disclosures with proposals to amend the 
Securities Acts of 1933 and 1934 requiring companies 
to provide climate-related information in their registration 
statements and annual reports37. Assessing climate-
related factors not only helps individual companies 
better understand the risks they face, but also allows 
greater assessment of systemic risk across the market 
globally and informs the compound effect of irreversible 
climate change. All of which will directly impact how 
assets are invested, as well as marketed and sold to 
investors (see Appendix 3).
In an effort to address the financial risks from climate 
and sustainability globally, the International Sustainability 
Standards Board (ISSB) is also proposing new rules 
which would require companies to disclose the risk they 
are exposed to38. The proposals are currently under 
public consultation but intend to require companies 
to disclose information on sustainability risks and the 
impact on the value of their business. In addition, 
companies will be required to disclose information 
regarding the metrics and targets on how they measure, 
monitor and manage climate-related risks in particular.
Big Short Mark II 
37	   https://www.sec.gov/news/press-release/2022-46
38	   https://www.ifrs.org/news-and-events/news/2022/03/issb-delivers-proposals-that-create-comprehensive-global-baseline-of-sustainability-
Redefining Value in ESG: The Myriad of Paths to the Summit
22

With the current sustainability shift, the concept of value 
is being radically redefined. Ultimately, the answer to 
the sustainable investment challenge relies on the need 
to rethink the information required ahead of making an 
investment – in terms of the new risks attached to that 
investment decision and timing of execution. While a 
portfolio manager can have a great investment idea, 
any inability to enter or exit a strategy in a timely manner 
can have negative consequences on returns. Recent 
markdowns on fund exposure to Russian assets after 
its invasion of Ukraine are a case in point. 
The sustainability outcome of the investment is what 
matters most, rather than highly codified attempts to 
define the investment strategies. 
To achieve this requires information relating to the 
activity of the underlying company, subsidiary or supply 
chain, as well as the products and services they supply 
and the employees who work within their organisations. 
Using existing global frameworks and industry 
standards such as ISO, iXBRL and FIX Protocol to 
replicate the transition of ESG data alongside financial 
data will be the most effective way to deliver this (see 
Appendix 5). For example, a useful indicator of better 
management is the presence of a robust, credible, and 
reliable Environmental Management System that is built 
upon ISO 14001. Direct company data can then be 
imported using FIX Protocol and distributed into order 
and execution asset management systems (OMS and 
EMS) – not just to establish investment criteria but to 
incorporate liquidity risk as well.
The Data Path Ahead
“We use our own internal research selection process based on our 
own data to focus on companies who will facilitate the faster transition 
to the right future. BP is a case in point. Beyond Petroleum saw the 
largest investment in solar, but some may invest because they want 
the dividends from oil revenues. An exclusion policy is a blunt tool, 
you need to look at whether the company is behaving responsibly. 
Responsible oil and gas held by listed national companies is probably 
a good thing to transition to, rather than private equity or even a focus 
towards shareholder interests first.”
Head of Sustainability, UK Mid-sized Asset Manager 
Redefining Value in ESG: The Myriad of Paths to the Summit
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Moving available information away from rating agencies’ 
corporate sustainability reports is essential in this 
regard. Often information is manually keyed in which 
can be subject to errors, inconsistencies or gaps, with 
an inability to verify accuracy or agreement. Ratings 
may conflict with each other or the asset management 
firm’s view of sustainable investing. A firm’s internal 
view of their appetite for exposure may also differ from 
issue-based analysis (primary) to secondary market 
investment exposure. Data is required at the product 
level (fixed income and for more complex equity 
products) when looking at subsidiary and supply chain 
risk.
Mandatory disclosures reporting is already reflected in 
financial accounts including International Accounting 
Standards IASB, FASB or reporting on sub-set of 
sustainability topics considered material for enterprise 
value creation – Sustainability Accounting Standards 
Board (SASB), Climate Disclosure Standards Board 
(CDSB) and International Integrated Reporting Council 
(IIRC). 
The issue here is that current regulatory-mandated 
reporting looks at ESG data through a local lens 
whereas asset management is global. 
Using international standards such as reporting 
that reflects an organisation’s significant impact on 
economy, environment and people – Global Reporting 
Initiative (GRI) and Carbon Disclosure Project (CDP) 
or Corporate Sustainability Reporting (CSRD) – would 
enable this information to be reported into a centralised 
data repository. This would be similar to how US Edgar 
produces machine readable reporting standards via 
iXBRL, which has also now been mandated in the EU 
as well.
The Data Path Ahead  
Redefining Value in ESG: The Myriad of Paths to the Summit
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Sustainable investing covers a myriad of investment 
strategies; but as the concept moves from a bottom up 
risk assessment of how a company is run, to the impact 
the investment will have on the future of society – the 
concept of “value” itself will change. 
Different firms currently have different investment 
strategies and are on varying stages of the journey 
to the sustainable summit. The relevant investment 
strategy in question will determine how any data 
obtained will affect the investment decision. Investing 
in fossil fuels may be appropriate if the company is 
facilitating a faster transition to renewables and as such 
may be considered a “good” investment by that fund. 
Once the data question has been solved, the issue over 
how to successfully “green” a portfolio will become 
easier and capital markets can quickly support the 
transition to a sustainable future. 
While sustainability as an investment strategy is seen as 
a mountain worth climbing, there are multiple routes to 
the summit with regard to how investment decisions are 
made. Right now, the industry is still at base camp. The 
rising investor appetite for sustainable investing is not 
yet matched by global companies’ ability to pivot fast 
enough towards sustainable business models. The risk 
is that investor demand will be met by over-promised 
performance and the risk of greenwashing.
Specific ESG products may be easier to benchmark 
today when focusing on being aligned to net-zero or 
decarbonising by 30 or 50%, but as these products 
move across the spectrum there is far greater risk of 
greenwashing inadvertantly rather than deliberately. 
At that point, the importance of matching the right 
product to the clients investment objectives becomes 
critical. 
ETFs can support asset manager use of passive 
investing to lower costs, but the level of success still 
depends on meeting a client’s underlying investment 
objectives. Investors may want to do good, but 
the jury is still out on the extent to which they are 
prepared to sacrifice performance of the investment. 
In addition to an investment risk, the increasing risk 
of portfolio concentration creates higher liquidity risk, 
which necessitates re-benchmarking, unwinding and 
reinvesting. 
Regardless of the investment style – active or passive 
– the critical question is what level of sustainability is 
an investor is comfortable with. This will dictate the 
information to be sourced and the extent to which it will 
necessitate any changes to the investment – whether 
that is in equities, bonds, ETFs, derivatives or even now 
ecological assets. It all comes back to the investment 
outcome and, for that assessment, investors need data 
and analysis to provide relevant context. The consistent 
introduction of more granular and prescriptive regulation 
will help provide consistency in how companies and 
benchmarks are classified.  
However, the first step for the industry is to move 
towards greater principles-based regulation around 
sustainability remains access to accurate and 
consistent data. That is the most effective base camp 
solution for the sustainable investment mountain that 
lies ahead. 
Looking Forward  
Redefining Value in ESG: The Myriad of Paths to the Summit
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Appendix 1 –  
SFDR extended to MiFID II 
EU Commission Delegated Regulation (EU) 
2021/1253 of April 21, 2021 has introduced  
revisions to MiFID II, integrating sustainability 
factors, risks and preferences into reputational, 
procedural and organizational requirements and 
operating conditions for MiFID II investment firms. 
There are similar requirements for UCITS and 
AIFMD regulations.
MiFID II investment firms who distribute product will 
need to ask investors whether they would like to take 
sustainability into account when making investments. 
If investors express interest in making sustainable 
investments, MiFID II investment firms must then 
provide them only with products that either;
a) are aligned with the EU sustainable taxonomy or
b) possess a minimum level of sustainable investments 
as defined by SFDR.
There are also rules on the concept of “sustainability 
factors” and “sustainability risks” disclosures of 
sustainability-related information for firms offering 
investment advice and portfolio management services.
a) If the financial product does not promote 
environmental and/or social characteristics  
(Article 6), it cannot be sold to clients or potential  
clients with sustainability preferences;
b) If the financial product is aimed at sustainable 
investment (Article 9), it can be sold to clients or 
potential clients with sustainability preferences.
However the categorisation of sustainability preferences 
in MiFID II is not fully aligned with that of financial 
products identified in the SFDR. There are question 
marks over whether financial products in Article 8 of the 
SFDR, while not being considered suitable for clients 
who have sustainability preferences, could still be 
marketed as promoting environmental and/or  
social characteristics.
In terms of organisational procedures, MiFID II 
Investment Firms providing services should; 
a) ensure sustainability risks are considered in 
decision-making procedures, organisational structure, 
compliance controls, internal reporting, record keeping, 
and risk management policies and procedures.
b) include clients sustainability preferences in the 
identification of conflicts of interest 
c) provide a description of the sustainability factors 
considered in the selection process of financial 
instruments within the investment advice to clients
d) where firms provide financial advice or portfolio 
management, they must
a. conduct an assessment of suitability to include how  
it meets their clients sustainability preferences.
b. have policies to show they – the firm – understand 
the sustainability factors of products
c. include sustainability preferences in reports on 
suitability of product provided to clients.
In terms of organisational procedures, MiFID II 
investment firms manufacturing financial products 
should; 
a) identify sustainability-related objectives in its 
identification of a target market;
b) ensure the sustainability factors of the product are 
consistent with target market; 
c) display the sustainability factors; and 
d) ensure that information on the sustainability factors of 
investment are transparent and relevant for distributors.
Appendices
Redefining Value in ESG: The Myriad of Paths to the Summit
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Appendices
ESMA Sustainable Finance Implementation Timeline
Source: ESMA
Redefining Value in ESG: The Path Ahead
27

Appendix 2 –  
Articles 8 and 9 of SFDR
Articles 8 and 939 of the SFDR require more 
information on how the promotion of environmental 
and social characteristics are met.
Article 8 products only commit to integrating ESG 
criteria into the investment process. They promote 
environmental and/or social characteristics but do not 
have sustainable investment as their primary objective.
Article 9 products do have sustainable investment 
as their primary objective and are required by the 
SFDR to make a positive contribution to at least one 
sustainability goal and to demonstrate the impact 
achieved transparently. 
Article 9, in particular, requires that where an index 
has been designated as a reference benchmark, 
information is provided on how this index is aligned 
with the sustainable investment objective as well as an 
explanation as to why and how it differs from a broad 
market index. 
Under Article 8 currently around 20% of all mutual funds 
are classified as “light green” sustainable investments, 
while about 5% are classified as “dark green” under 
Article 9. 
However, even this is undergoing a state of flux given 
the recent energy crisis with Brussels now looking to 
recognize nuclear power and natural gas as “green” 
activity despite considerable opposition from  
many quarters40. 
Appendices
39   https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-taxonomy-sustainable-activities_en
40	   https://static1.squarespace.com/static/5f7709cd633d6220bbee2709/t/61e1939054123e426d5d391a/1642173330735/Taxonomy+CDA+-+ISFC+Reaction.pdf
Redefining Value in ESG: The Myriad of Paths to the Summit
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Appendices 
Appendix 3 –  
United Nations Sustainable 
Development Goals (SDGs)
Source: United Nations
Sustainable Development Goals
Redefining Value in ESG: The Myriad of Paths to the Summit
29

Appendices 
Appendix 4 –  
US Regulation 
After the Federal Reserve Bank of Chicago recently 
released a framework41 merging climate change risk 
categories of physical, transition and liability risk with 
the more traditional means of assessing risk in financial 
markets — market, credit, liquidity and operational risk 
— the SEC have also released proposals on climate 
related disclosures.  The proposals require registrants to 
disclose information regarding governance of climate-
related risks and management of those risks; how any 
climate-related risks could have a material impact on 
its business in the short, medium or long-term; how 
these risks may impact business strategy and outlook; 
and the financial impact of any climate related events.  
The proposals also include requirements to disclose 
information relating to greenhouse gas emissions – from 
direct emissions (Scope 1) to activities within the value 
chain (Scope 3) if these are material, similar to the Task 
Force on Climate-Related Financial Disclosures and the 
Greenhouse Gas Protocol.
Appendix 5 –  
Rise in Exchange-Based ESG 
Products 
Despite timid debuts, ESG ETFs have grown 
exponentially over the last few years with, for example 
at Deutsche Börse Xetra 436 ESG ETFs in October 
2021 up from 33 in 2016. Volumes in these securities 
are also picking up, standing at 16.1% of order book 
turnover up from 0.3% in 2016 as a growing numbers 
of liquidity providers commit to supporting the transition 
by making a market in these new ESG products  
(see Exhibit 6). 
ESG ETFs listed on Deutsche Börse Xetra
Exhibit 10
ESG ETFs listed on 
Deutsche Börse Xetra
2015
2016
2017
2018
2019
2020
2021 YTD
(Oct 2021)
Number of ESG EFTs
% of all Xetra-listed EFTs
18
1.6%
33
2.9%
42
3.5%
84
6.1%
149
9.9%
252
15.6%
436
25.3%
Assets under management 
(€ million)
% of all Xetra-listed EFTs
1,300
0.4%
2,505
0.6%
4,926
0.9%
7,390
1.4%
25,465
3.6%
80,862
10.3%
174,586
16.8%
Order book turnover 
(avg/mth) (€ million)
% of all Xetra-listed EFTs
26
0.2%
35
0.3%
69
0.6%
110
0.9%
261
2.5%
1,017
6.2%
2,656
16.1%
Source: Deutsche Börse
Notes:
ESG ETF classification before 2021 based on individual issuer assessment and own analysis. 
ESG EFT classification as of 2021 based on SFDR (Art. 8 and Art. 9).
Data reflects new ESG ETF listings as well as EFT reclassifications due to benchmark changes 
from non-ESG to ESG indices.
41	   https://www.chicagofed.org/publications/chicago-fed-letter/2020/448
Redefining Value in ESG: The Myriad of Paths to the Summit
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Appendices
Appendix 6 –  
Current ISO Standards Being Used in 
Financial Services/Sustainability  
ISO 20022 provides a methodology for the creation 
of financial messages and maintains the ISO 20022 
Financial Repository, a publicly available catalogue of 
messages and central dictionary of business items. 
ISO 20022 enjoys wide adoption by financial market 
infrastructures and their communities for the processing 
of transactions in the areas of payments, securities, 
credit/debit cards, foreign exchange and trade finance. 
ISO 20022 is already leveraged in several contexts 
for the construction and exchange of standardised 
regulatory reports in the financial industry. 
ISO 32220 – Sustainable finance – Basic concepts 
and key initiatives provides an internationally agreed 
glossary of terms and definitions to enhance global 
understanding and coherence. The technical report 
features a non-exhaustive list of those commonly 
used in financial markets, intended to guide financial 
regulators, banks, asset managers, investors, 
researchers and more.
ISO 17442 – Legal Entity Identifier (LEI). The LEI 
provides a unique identifier for legal entities, which can 
be leveraged for identifying parties for ESG activities 
and reporting.
ISO 20275 – Entity Legal Forms (ELF). The ELF works 
alongside ISO 17442 for the identification of entity 
legal forms in a structured way, enabling entities to 
be classified according to the nature of their legal 
constitution. Again, this is helpful in the area of ESG-
related reporting.
ISO 6166 – International Securities Identification 
Number (ISIN). The ISIN identifies financial instruments 
and can be used in connection with the reporting 
and identification of financial instruments linked to 
sustainable activities, such as green bonds. The ISIN 
can be used in conjunction with two further standards; 
ISO 18774 (FISN) which provides financial instrument 
short name, and ISO 10962 (CFI code) for classification 
of financial instruments.
ISO 4914 – The Unique Product Identifier (UPI) is a 
new standard being published in autumn 2021, for the 
identification of certain types of derivatives products.  
This can be relevant with the upcoming move to offer 
financial derivatives products related to environmental 
risks and green investing. 
Redefining Value in ESG: The Myriad of Paths to the Summit
31

About this report
This study has been produced by independent financial services research 
group Redlap Consulting. It was commissioned by the FIA European 
Principal Traders Association (FIA EPTA), which represents Europe’s 
leading Principal Trading Firms. Its 24 members are independent market 
makers and providers of liquidity and risk transfer for end-investors across 
Europe. FIA EPTA works constructively with policymakers, regulators and 
other market stakeholders to ensure efficient, resilient and trusted financial 
markets. To find out more visit www.fia.org/epta
About Redlap Consulting
Redlap consists of a group of experienced industry professionals who 
have a deep knowledge of capital markets. Using this as the basis of 
research this enables us to provide detailed and thought-provoking 
research on the impact of evolving market structure globally.
About the Author
Rebecca Healey
Rebecca is a leading industry voice on market structure, regulatory 
reform, and financial services technology. Writing research since 2011, 
Rebecca has authored a plethora of qualitative reports and commentaries 
covering the impact of market regulation on all asset classes, the 
impact of the rise of fintech in capital markets, as well as the impact of 
the move to esg and sustainability in asset management; focusing on 
how technology can help address current challenges, improving capital 
markets both for participants and investors.
Rebecca is co-chair for FIX EMEA and a member of the Consultative 
Working Group (CWG) of ESMA’s Secondary Markets Standing 
Committee. In relation to ESG, Rebecca is co-chair of the FIX Working 
Group on ESG; Convenor for the ISO/TC 68 Sustainable Finance Advisory 
Group; a member of ISO TC 68 Strategic Leadership Group and serves 
on the ISO Technical Management Board committees of Climate Change 
Coordination Committee (CCCC) and ISO Positioning and Consultation 
Responses (CCCC-TG 4).
Disclaimer
This document is not investment advice or intended as a recommendation 
to buy or sell any instrument covered within it.
Although the statements within this document are believed to be correct, 
they have not been verified by the author and should not be relied upon 
when considering the merits of any particular investment.
All presented data may be subject to slight variations.
All data and figures are Redlap Consulting internal data unless  
stated otherwise.