Benchmark equity indexes should start incorporating environmental, social and governance (ESG) data into their rules, a major insurer has said.
Currently, the big indexes such as the S&P500, the MSCI World or the FTSE select and rank companies mainly according to their market capitalisation.
But German insurance giant Allianz has suggested that these mainstream benchmarks should consider incorporating material ESG factors.
This, claims the firm, which owns Allianz Global Investors and Pimco, would help to drive a change in behaviour of the corporates and investors.
"As well as size, these indexes should look at quality - such as how well prepared a company is for the transition to a low-carbon economy," said Nicolai Tewes, a spokesperson for Allianz. "This could help indexes be more forward looking and present the companies of the future."
Such a move would represent a radical departure from the current role that the benchmark indexes play.
A number of low-carbon and ESG indexes have sprung up in recent years in response to investor demand, and these generally use a large benchmark index as an 'underlying'.
But Tewes said these ESG indexes, although important, remain "niche" products. In order to make a significant change in the behaviour of both companies and investors, the mainstream benchmarks themselves must start incorporating these factors.
"The most powerful thing you can change in the capital markets is if the indexes design clear rules, starting with transparency on these topics," he added. "The indexes are interested to provide the most powerful set of companies you can invest in. We think it absolutely makes sense that ESG criteria become part of the criteria for the large indexes."
Benchmark indexes have the power to change corporate behaviour, he claimed – the German DAX changed its rules a number of years ago to take into consideration the number of investors in a company. This prompted a swift response from companies to increase the number of their shareholders, so that they could boost their index ranking.
He called on more investors to ask index providers to consider the use of ESG factors.
"The indexes say if all clients were interested, they would be happy to think about it – but not if it's only Allianz. That's why we try to convince other large investors that this move would really make sense."