ESG: Is it the new normal for electronic trading?

One of the most in-vogue acronyms relating to institutional investing and managed funds at the moment is ESG.

ESG stands for Environmental, Social and Governance, and refers to policies within companies that appear to ‘give something back’ to the world outside their business.

Often, ESG policies include non-financial factors as part of their analysis process which are intrinsic in developing and accessing growth and investment opportunities.

Although the high-profile use of ESG policies in financial services is quite new, the term itself dates back almost two decades, to a landmark study at the “Who Cares Wins” conference in 2005, at which institutional asset managers, buy and sell side firms and global government officials were present.

ESG is very marketable

The ESG, or ‘socially responsible’ ethos that many financial services companies have been adopting over the past few years marks the exploration of an opportunity to reach new client bases, and to appear to break away from the hard-nosed, corporate capitalist image that many large financial institutions and wealth managers have among first-time investors, or a percentage of persons or entities not involved in the capital markets business. It’s ideologically aligned with the mood of the moment. The climate and the perceived effect of human behavior on the environment are regularly portrayed by journalists and politicians and appearing to be responsible is therefore very marketable.

There has been a noticeable discussion within the financial services industry since this decade began which centers on whether ESG products and services may become part of the mainstream product ranges offered by financial services companies, and in particular FX and CFD companies.

FX and CFD brokers focused on popular instruments

Whilst it is certainly the case that some of the large investment banks, wealth managers and hedge funds have embraced ESG products and offer ESG asset classes and managed funds, the FX and CFD sector is still largely focused on the common and popular asset classes which have been the order of the day since the retail forex trading boom took place in the mid-2000s.

Largely, most brokerages today continue to focus on their core product ranges such as spot FX, and CFDs on currency pairs, indices and company stock listed on major European and American stock exchanges.

Some wealth management companies are making ESG a priority. For example, Australian wealth manager AMP Capital, a company that was established some 173 years ago, has majored on ESG for quite a few months now. The company proactively advertises that it is integrating ESG components across its entire range of asset classes.

Many large institutions on Wall Street have gone this route too. In May 2020, four investment banks were involved in a study by KPMG on ‘sustainability’. In the KPMG report, a connection was made between the then-unknown post-COVID lockdown world and the ‘new reality’ that may ensue.

The authors of the report noted that issues related to human equality, access to health services and societal welfare topped the agenda. It quickly became clear that the environment and social issues have a deep and direct influence on economic stability.

At the same time, the economic contagion that followed seems to have infected the carbon economy the hardest. Oil prices plummeted on historically low demand. In fact, oil prices made history by going into negative equity.

This was a fad, however, and now the world has forgotten about that, and oil is not only back up to pre-lockdown values, but has been reaching all-time high points as demand is stronger than ever and suppliers unable to produce and export the stuff quickly enough.

The use of oil at record high levels should be enough of an indicator that the world’s economy is still using traditional materials and products as a mainstay, therefore giving rise to ESG being perhaps a fashionable attempt to gain new and alternative investors who would otherwise either not invest, or would castigate banks and fund managers as cold, hard capitalists.

A refined marketing tool, perhaps.

Brokers enjoying the Crypto ride

As far as the FX and CFD world is concerned, continuing to look after the needs of loyal clients and traders who are used to their range of very popular, mainstream assets such as spot forex and CFDs on equities and indices is vital. More traders became active during the past two years than ever, and they have not been looking toward obscure and unknown instruments; they’ve been looking at the current range offered by most brokerages.

In fact, many retail brokerages that have had surges in new client acquisitions have done so due to cryptocurrency products rather than any environment-orientated alternative class.

Therefore, as long as the world’s economy carries on as normal regardless of what is being portrayed on television, it looks like ESG products as a mainstream feature in FX and CFDs is a long way off.

 

Natalia Zakharova is the Head of Sales at FXOpen

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