Hello, my name is Malcom Gordon. I'm head of the UK institutional business here at UBS asset management. And we're here today to talk to you about benchmarking within our index business. But I'm joined by my colleague Boriana.

Hello, my name is Borinant Iordanova. And I'm the index Research Analyst within the systematic and index investments team here at UBS. And I'm very happy to have a dialogue with Malcolm on the topic of index and sustainability.

Every day, and when we're discussing indexation, one of the first head scratching topics that comes up is what benchmark should I choose? And there are over 3 million indices globally, you know, almost more indices and there are populations in certain countries. So how should investors and indeed asset managers think about that process of benchmark selection, benchmark choice?

Yes, indeed  selecting an index in our opinion is a multi step iterative process which contains a number of qualitative and quantitative indicators. We think that multiple aspects needs to be considered, which could broadly be put into three main groups. index construction, index governance and commercial aspects of the index

.And here at UBS we have dedicated to such resources who can help clients with that decision.

I think one of the key topics of the day with asset owners is obviously sustainability or ESG. And we are seeing quite a seismic shift of assets towards those those areas of investment. So when it comes to ESG, you know, do investors have to pick an off the shelf ESG index or what what options do they have open To them?

So both options really are possible both off the shelf indices or custom indices, there's some excellent third party off the shelf indices, but the trend is towards customization becausewhen  it comes to ESG different investors have many different sustainability goals, hence the demand for customization.

But also we'll be interested to hear from your perspective, what do you see from brands, what do you hear from their perspective?

It's an interesting question. I think what we see is almost it depends on the client. So for some of the largest, most sophisticated clients who have a governance budget, they have resource, they have depth of understanding quite often they move just straight customization. But I think for those clients who are still on their journey of understanding their journey, of discovery around the topic of ESG, what we tend to see is that off the shelf indices act as a very sort of comforting first step, a lot of the heavy lifting around and thinking, the construction is taken care of for them and really as that comfort level grows and customization starts to have a greater impact in the in the portfolio. 

So I mean just staying on the theme, you know, as as much as there are 3 million indices globally. There are a huge number of index providers. And so do you see kind of any key differences between the index providers? Are you seeing kind of the emergence of any sort of niche providers looking at specific areas, what does that landscape look like? 

Sure so providers have dedicated significant resources over the past 15 or so years in developing another type of non market equity indices, namely the risk premia factor indices. And they developed a number of approaches of constructing those ranging from exclusion based optimization based use risk model or sequential tilting. And what we're observing is that index providers are now using those already established frameworks to construct sustainable indices. And one of the key aspects is the sustainable database that is being used. And here we're observing some index providers are developing this in house and building their own capabilities. And some of them are using best in class third party database. And we believe this is where the indices are differentiating one from another.

I suppose just  challenging you slightly on that when it comes to sustainability. I think one of the things that the industry would would very much accept as a challenge is data, data quality, the depth of data to the overall integrity, do you actually believe that the index providers have got that right, they have what they need to construct impactful indices?

Well, index providers do put significant resources into the sustainable databases, but it is a fact that a large portion of the ESG data at the moment is estimated rather than reported. And even when it is reported, unlike fundamental data, this data is still not audited. So there is a very big difference between the sustainable ESG data that you see from the different index providers, and what we believe is important is to carry out in that due diligence, and I mentioned already earlier or one of the three key pillars in selecting indices is the governance and for sustainable indices, the ESG data  is important in that governance pillar. 

So suppose you're taking a scenario, you're an asset owner, you've partnered with your investment manager to select what you believe to invest in best in class benchmark, but it may not be perfect, it may meet 95% of your needs, but not all your needs. So what are some of the options available to asset owners in those type of situations to almost get as close to perfect matches as they can? 

Yes, and this is a scenario which we witness frequently with clients. So we tend to start with a good off the shelf index, which meets some of the requirements just as we described. And then we see this final portion that is missing what actually the client would like to do, what they need more customization would they want to have the flexibility of incorporating more of their sustainable goals in the future, and then try to work around that and provide this additional customization. So this is for the technical side and from the construction perspective, but also curious to know what else is out there other than constructing the index for the client, what in your opinion, is important point from a sustainability perspective in indexing?

I mean, I think that the one area that is an absolute base case expectation from all clients, quite, quite rightly, is the incorporation of stewardship and engagement into into passive investment. And you could make the argument that it's actually even more important in a passive mandate than it may be an active mandate, but you know you don't have in a passive mandate the optionality to buy or sell a company because it's doing good or doing doing harm in the same way as you could in an active portfolio. And so really, using the power of the invested asset to influence change through both voting and engagement is an absolute expectation from from asset owners. And I think one thing I would observe as we've seen in a lot of markets are a sizable shift away from active to passive. What this has done is to give passive managers a more influential voice with companies than perhaps they they had 20 years ago. And so really, that sort of corporate engagement should be seen as almost an intrinsic part of the investment process. And I think, you know, just voting as well. It's really important that managers where they're permitted to do so on behalf of asset owners. Use that power of the vote to basically state their views to corporates and look to influence for good and ultimately for for enhanced financial return. So that for me, I think, no matter the client is our core expectation on any index manager.

Thank you Malcolm, and thank you to everyone who tuned into our podcast today. 
Good day.