Trading Adapts to ESG and Sustainable Investing
By Frank Loughlin, Global Co-Head of Equity Trading, AllianceBernstein
Environmental, Social and Governance (ESG) has expanded rapidly in recent years, and the standards-based approach is now widely accepted as here to stay. Global ESG assets are set to increase to $50 trillion in 2025 from about $35 trillion as of earlier this year, Bloomberg Intelligence estimated.
Within institutional investment firms, ESG has so far been largely the province of the chief investment officers, portfolio managers, and analysts who apply these non-financial factors as part of their methodology to identify material risks and growth opportunities. But ESG is now making its way down to the trading desk.
Traders are increasingly being asked some version of the questions “Does ESG have a place in trading?” and, “How does ESG fit into the execution space?” As investor appetite for strategies which incorporate ESG and sustainability continues to grow, inevitably the interest turns to other parts of the investment life cycle beyond portfolios, which naturally includes execution.
Our industry finds itself in the early stages of what will, no doubt, be an iterative process to answer the question “How does ESG relate to the trading desk?” Topics such as the environmental impact of trading platforms and infrastructure; the use of AI in trading strategies; the sustainability of our trading partners and vendors; the diversity of our own teams and the teams we partner with; and the consequences of bitcoin mining and other things crypto, will inform and guide this significant and ongoing conversation.
The financial markets trading industry is stepping up to the task of embracing ESG, both at the individual desk level and collectively.
Take, for example, Sustainable Trading (Sustainable Financial Markets Ltd.), an inclusive membership network dedicated to driving positive change on ESG practices within trading. The non-profit network was founded in February 2022 by industry veteran Duncan Higgins, a former ITG executive, with 30 founding members from asset management, banking and brokerage, market making, exchanges, technology and service providers.
Around the same time as the notion of ESG piercing the execution ecosystem was taking hold and the industry was beginning to think of solutions and frameworks to connect ESG to trading, Higgins was looking for a way to make a bigger positive impact on the climate crisis. What followed over the next almost twelve months was the formation and launch of Sustainable Trading. As Duncan said recently “At a time when ESG and sustainable investment had become a dominant investment approach, there hadn’t yet been a connection to the operational impact of trading.”
Sustainable Trading was created to help facilitate the ongoing dialogue around ESG in trading and help frame industry best practices for integrating and measuring ESG in the execution process. Introducing an engagement framework at the trading desk level to create practical and measurable ESG best practices will hopefully result in positive change across the industry. Creating broad networks of ESG champions across the trading landscape will only serve to strengthen our collective approach to incorporating ESG and sustainability principles into our trading businesses.
Among the founding members, drawn from across the industry, are: Aegon Asset Management, AllianceBernstein, ArchES, AXA Investment Managers, Bank of America, big xyt, BMLL Technologies, BMO Capital Markets, BTIG, Credit Suisse, Equinix, Euronext, Federated Home, Instinet, Invesco, Investec, Jefferies, Liberum, Liontrust, London Stock Exchange Group, M&G plc, Neovest, Ninety One, Options Technology, Outset Global, Redburn, Russell Investments, State Street Global Advisors, T. Rowe Price and Union Investment.
As with any dynamic initiative, the ability to be introspective will be critical. The Sustainable Trading board of directors, steering groups and working groups are busy setting the agenda and leading the work streams that will form Sustainable Trading’s engagement framework, a framework we hope will help us create a more sustainable industry.
At AllianceBernstein, our commitment to responsibility is engrained in our firm’s culture. We pursue responsibility at all levels, from how we work and act to the solutions we deliver to clients. Responsible execution is part of our unwavering commitment to being a responsible firm. Specifically, we are working to create an ESG framework for trading which will include criteria for evaluating the sustainability of our vendors and service providers, and a methodology for assessing the diversity of our major execution partners at all levels of the organization. We will also continue to build out our support of diverse owned enterprises. This has been a major initiative for the last several years, practicing what we like to call “inclusive capital” to partner with diverse firms in a way that will form lasting commercial partnerships. Emma (Quinn, my partner and global co-head) and I are extremely proud of the diverse and talented trading team at AB, one that is 50% female globally, and we hope that our team will be seen as a model for what diversity in trading can look like.
CHALLENGE FOR EXECUTION ECOSYSTEM
In addition, through our participation as a founding member and board director of Sustainable Trading, we hope to drive an industrywide conversation focused on the climate impact of our collective technology stack and use of AI in quantitative trading strategies. Tackling this challenge will require participation from the entire execution ecosystem – asset managers and hedge funds, banks and brokers, exchanges and venue operators, technology vendors – to create meaningful and implemental solutions to deal with the environmental impact of trade execution infrastructure.
I was pleased to participate in the “Embedding ESG & Sustainability in Trading” discussion at TradeTech Paris on May 12. As a founding member of Sustainable Trading, AllianceBernstein was honored to be represented on the panel and I was flattered to join the discussion with some real industry stars, including Duncan and fellow Sustainable Trading board member Cathy Gibson. Anita Karpi of Plia, Barry Fitzgerald of Man Group, and Rebecca Healey of Redlap Consulting also joined the dialogue. We had a robust conversation around defining ESG in trading, ESG evaluation tools and potential new ESG products and instruments. As we are in the very early innings of the ‘ESG in trading’ conversation, we all have the ability to positively influence the direction of the work, as well as the dialogue. Creating a framework that is equal parts broad, challenging, implementable and measurable is critical to the success of this key industry initiative. I was happy to share my thoughts with fellow panel members and conference attendees on this important and evolving theme for our business, and I look forward to continuing the dialogue.