TradeTech: Where does ESG fit into trading?

By Gill Wadsworth.

Incorporating environmental, social and governance considerations into trading decisions is relevant for 80% of traders attending this year’s TradeTech.

Responding to a poll just one-fifth of buyside equity traders said they thought ESG should not be a best execution consideration.

Barry Fitgerald, head of risk technology at Man Group.

Barry Fitgerald, head of risk technology at Man Group, said ESG should be relevant across an entire organisation.

“I like to think about ESG as a jigsaw,” he said. “There are big reputational risks to a firm that if you’re missing pieces of your ESG approach, you could be accused of greenwashing. It has to be part of trading and compliance and marketing. ESG is really crossing right across firms.”

Duncan Higgins, founder of Sustainable Trading.

Acknowledging the 20% of traders who do not believe ESG is relevant, Duncan Higgins, founder of Sustainable Trading, said responsible investment can be considered the sole responsibility of the portfolio manager.

“A reasonable proportion of traders do not believe ESG is relevant and that’s okay because you’re probably thinking, we get that order flow from the portfolio managers, they’re choosing the strategy and we are here to execute that,” Higgins said.

Frank Loughlin, global co-head of equity trading at AllianceBernstein.

However, Frank Loughlin, global co-head of equity trading at AllianceBernstein, said traders’ decisions should reflect the interests of those asset owners who expect ESG to be incorporated at each stage of execution.

“Quite simply, since asset owners care about ESG and the portfolio’s trading is part of the investment process, by natural extension traders should care about ESG in the execution process as well,” he said.

While asset managers have experienced a deluge in sustainable finance regulation in recent years- notably the Sustainable Finance Disclosure Requirements which demand ESG labelling for all investment products, traders have not been subject to the same regulation.

Last September, the Global Foreign Exchange Division, part of the Global Financial Markets Association (GFMA), published a proposal looking at the benefits if including good ESG practices in FX trading.

The GMFA called on the buy side to commit to the FX Global Code as part of its collective ESG commitments.

Cathy Gibson, global head of trading at Ninety One.

Cathy Gibson, global head of trading at Ninety One, welcomed the code as part of a voluntary ESG framework and warned delegates that unless the buy side was more innovative and proactive on sustainable issues, it faced regulation in future.

She said, “Industry-led solutions are always preferable to regulatory ones. If we can get ahead from the trading perspective and actually come up with our own solution in the ESG space, we can avoid regulation. I think we have the time and the time to do that is now.”

Speaking after the event, one senior trader said that while ESG was welcome at an organisational and operational level, a clearly defined way of applying ESG principles to trading was missing.

“We all want to use fewer paper cups, all of the positive considerations are as true for trading as for any other part of the organisation, what I miss is whether there is something specific to trading, that is not true for the firm overall,” he said.

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