Sustainable investing is very much on the minds of investors around the world. This is the key to remember Index Industry Association (IIA)’s fifth annual survey of independent global index providers.
By measuring the number of indices around the world across asset classes, geographies and categories, the IIA Annual Benchmark Survey serves as a useful temperature check for global investors and led us to a deeper analysis of emerging areas of investor interest. Members of The IIA continue to administer more than 3 million indices worldwide, and with 9,000 to 10,000 exchange-traded products (ETPs), it is clear that most indices are used for trading purposes. benchmarking and not for investment products. The unprecedented growth of environmental, social and governance (ESG) indices and the continued expansion of bond indices in recent years has created more benchmarking tools and will provide asset managers with better tools to create better investment products for investors.
The results of this year’s survey show that the light for ESG, or sustainable investing, is still green. The number of indices measuring ESG criteria jumped by 43%. This is a record year-on-year (YoY) increase for all survey sectors and comes on top of a 40.2% increase from 2019 to 2020. For perspective, the most categories change within 5% YoY.
While not surprising, the latest survey results, combined with other IIA research, confirm a continuing and accelerating trend we have observed over the past few years. As global investors increasingly embrace sustainable investing strategies and regulators and policymakers focus more on ESG-related issues, the demand for reliable ESG market metrics has exploded. And index providers have stepped in to meet this demand.
The meteoric growth of the ESG Index over the past few years inspired us to launch The IIA first annual ESG survey of global asset managers earlier this year. The inaugural survey collected the views of approximately 300 asset managers in the US and Europe on a range of ESG-focused topics. It revealed that 85% of these managers consider ESG to be a high priority for their company. ESG prioritization is driving asset allocation, with the proportion of ESG assets in the global portfolios managed by this group set to increase from 26.7% in 12 months to 43.6% in five years.
In an environment of increased adoption of ESG, investors want more and better tools to measure their ESG investments. Lack of quantitative data was cited as a challenge to ESG implementation by 63% of respondents. The results of this year’s IIA benchmarking survey confirm these findings: asset managers overwhelmingly want more ESG indices in asset classes beyond equities.
Another key driver behind the rapid expansion of ESG indices in the market is investor confidence. According to our ESG survey, 80% of respondents believe indices help them quickly direct their investments to companies and sectors with strong ESG performance. A further 73% believe the indices improve the comparability of ESG performance, and 78% say the indices increase their confidence in the reliability of ESG data. Amid the evolving nature of many ESG issues, three-quarters of respondents find indices help them respond quickly to emerging ESG concerns.
Beyond ESG, our benchmark survey revealed a few additional areas for index expansion. Again, in a nod to the appeal of multi-asset strategies to investors, the number of indices measuring bond markets increased by almost 8% year-over-year. This eclipsed the 7.1% increase in 2020.
When it comes to ESG and fixed income, the survey found 61% more ESG indices in the fixed income sector. High-yield bond indices and total or composite market bond indices, as well as bond indices have also experienced impressive growth in the Americas.
Among equity categories, the thematic indices cohort was the only one other than ESG to show strong growth, growing 27.5% year-over-year, albeit from a small base. This represents something of a shift among investors from smart beta to more thematic investing approaches to better access emerging investing trends.
If you agree with me that there is a disconnect between the creation of indices and the development and sale of these products to investors, the number of products that asset managers will bring to market will increase over the next few years. Our survey results over the past two years indicate that ESG and fixed income are key areas for this growth. As more quantitative data on corporate disclosure becomes available, better ESG criteria will be created, leading asset managers to create better investment products that reflect the commitments of investors towards sustainable finance.
This is the fifth installment in a seriess of the Index Industry Association (IIA). The IIA will celebrate its 10th anniversary in 2022. For more information, visit The IIA’s website at www.indexindustry.org.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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