The number of environmental, social and governance (ESG) benchmarks and indices demanded by the asset management community has grown at an unprecedented rate over the past two years. That’s according to our latest Index Industry Association (IIA) member survey. By unpacking these high-level numbers, ESG indices have expanded beyond more traditional areas of integration into new asset classes and strategies.
The IIA polls our members each fall in our annual benchmark survey to understand where growth in the index industry is coming from. Last fall, the IIA found that the number of ESG indices increased by 85% over the past two years. In response, we conducted additional surveys of the global asset manager community in 2021 and 2022 to confirm that index providers are meeting the ESG needs of the investment community, assessing impact and monitoring potential impediments to growth .
That’s what makes the results of our latest survey of global ESG asset managers so interesting. The survey, conducted earlier this year, asked 300 investment fund companies in Europe and the United States. He found that amid geopolitical conflict, rising interest rates in many countries, a 40-year high in inflation and now recession fears, the influence of sustainable investment factors on the market ecosystem global has continued to accelerate.
Indeed, our survey found that ESG factors are even more important to global asset managers today than a year ago. 85% of asset managers reported that ESG has become a higher priority within their firm’s overall investment strategy over the past year.
Overall, has ESG become more or less a priority within your company’s overall investment strategy over the past 12 months (by geography)
Of course, given the extensive media coverage of ESG and its aggressive promotion by asset managers, these results may not be all that surprising. We therefore delved into our next question and asked asset managers to quantify the integration of ESG considerations into their portfolios. We wanted to understand how asset managers believe the future state of asset management will be. Expectations for ESG portfolio percentages over the next 12 months increased by more than 13% from last year’s survey. In addition, in 10 years, asset managers expect 64.2% of their portfolios to contain ESG elements. These double-digit percentage increases over last year’s results extend across all time horizons surveyed.
Roughly what percentage of your asset management portfolios at your firm do you expect to contain ESG elements in the future?
| Weighted average | Survey 2021 | Survey 2022 |
| In 12 months | 26.7% | 40.0% |
| In 2 or 3 years | 35.0% | 48.2% |
| In 5 years | 43.6% | 57.4% |
| In 10 years | 52.3% | 64.2% |
ESG integration has become so widespread that sustainable investment approaches have expanded beyond equities into other asset classes. The percentage of investors implementing ESG factors in their fixed income allocations soared to 76% this year, up from 42% just a year ago. In fact, ESG integration across all asset classes grew year on year, with the greatest expansion in fixed income. This trend shows no signs of slowing down: more than 80% of global asset managers expect the use of ESG criteria across all major asset classes to increase over the next 12 months.
What explains these results? Based on conversations with market participants, I believe that better data has led to better ratings and more research and development in fixed income, which in turn has created greater momentum to incorporate sustainable investing into asset classes. assets and portfolios.
In which asset classes does your company currently implement ESG criteria?
| 2021 | 2022 | |
| Fixed Income/Bonds | 42% | 76% |
| Equity/Shares | 53% | 74% |
| Merchandise | 37% | 47% |
This conclusion is not purely anecdotal: more than 9 out of 10 respondents agreed that tools, metrics and services for monitoring environmental impact, social sustainability and corporate governance were very or fairly effective. This is a significant increase compared to 66% in 2021.
Of course, given the concerns about greenwashing and the disparate data in the E, S, and G, this result seems optimistic. So far, environmental data is more quantifiable and directly measurable than social and government data. Within “E” ratings, agencies can standardize how emissions are measured across jurisdictions, for example. Conversely, privacy concerns make some social data difficult, if not impossible, to collect. More fundamentally, not all countries or cultures, let alone individuals, agree on what specific social priorities should be.
But the survey responses indicate a certain paradox: fund managers give equal weight to the E, S and G components, even though their attitudinal comments suggest that environmental concerns are more important at this stage of ESG development. In fact, 78% of respondents said that “environmental criteria should always take precedence over social and governance criteria.”
Which of the following best describes how each element of ESG is incorporated into portfolios?
Even in a year of economic and geopolitical challenges, global asset managers believe that demand for ESG investing will accelerate and expand further into more asset classes. This raises a number of questions: Will there be enough data to support the increased demand for ESG-oriented indices and tools? Will a global consensus develop on more than just the “E” in ESG? In other words, will sufficient knowledge be developed about social and governance criteria? These are topics we will be watching in our discussions with global asset managers over the coming years.
This is the sixth installment in a series from the Index Industry Association (IIA). The IIA celebrates its 10th anniversary in 2022. For more information, visit the IIA website at www.indexindustry.org.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Rick Redding, CFA
