Sustainable investing is very much on the minds of investors around the world. That’s the key finding from the Index Industry Association’s (IIA) fifth annual survey of global independent index providers.
By measuring the number of indices worldwide across different asset classes, geographies and categories, the IIA’s annual benchmark survey serves as a useful temperature check for global investors and has led us to a deeper analysis of emerging areas of investor focus. IIA members continue to administer more than 3 million indices worldwide and with between 9,000 and 10,000 Exchange Traded Products (ETPs), it is clear that most indices are used for benchmarking purposes not for to products to invest. The unprecedented growth of environmental, social and governance (ESG) indices and the continued expansion of fixed income indices in recent years has created more tools for benchmarking and will provide asset managers with better tools to create best investment products for investors.
The results of this year’s survey show that the light on ESG, or sustainable investing, continues to blink green. The number of indices measuring ESG criteria increased by 43%. This is a record year-over-year (YoY) increase for any sector in the survey and is on top of a 40.2% increase between 2019 and 2020. For perspective, most categories change in a 5% year-on-year.
While not surprising, the latest survey findings, combined with other IIA research, confirm a steady and accelerating trend we’ve seen in recent years. As global investors increasingly adopt sustainable investment strategies and regulators and policymakers focus on ESG-related issues, the demand for reliable ESG market measures has soared. And index providers have stepped in to meet this demand.
The increasing growth of the ESG Index over the past few years inspired us to launch the IIA’s first annual ESG survey of global asset managers earlier this year. The inaugural survey gathered perspectives on a range of ESG-oriented topics from around 300 asset managers in the US and Europe. It found that 85% of these managers consider ESG a high priority for their companies. ESG prioritization is driving asset allocation, with the proportion of ESG assets in global portfolios managed by this group expected to rise from 26.7% in 12 months to 43.6% in five years.
Amid increased ESG adoption, 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 Benchmark Survey support these findings: asset managers overwhelmingly want more ESG indices in asset classes beyond equities.
Investor confidence is another key factor in the rapid expansion of ESG indices in the market. According to our ESG survey, 80% of respondents believe that indices help them quickly direct investment to companies and sectors with strong ESG performance. Another 73% believe indices improve comparability in ESG performance, and 78% say indices increase their confidence in the reliability of ESG data. Amid the rapidly evolving nature of many ESG issues, three-quarters of respondents find that indices help them respond quickly to new ESG concerns.
Beyond ESG, our benchmark survey uncovered some additional areas for index expansion. Again, in a nod to the appeal of multi-asset strategies among investors, the number of indices measuring fixed income markets rose by almost 8% year-on-year. This eclipsed the 7.1% increase in 2020.
Regarding ESG and fixed income, the survey found 61% more ESG indices in the fixed income space. There was also impressive growth in high-yield bond indices and total market or composite bond indices, as well as fixed income indices in the Americas.
Among the equity categories, the thematic index cohort was the only one, apart from ESG, to show strong growth, up 27.5% year-on-year, albeit from a reduced This represents somewhat of a shift among smart beta investors towards more thematic investment approaches to better access emerging investment trends.
If you believe as I do that there is a lag between the creation of indexes and the development and sale of these products to investors, the number of products that asset managers will introduce to the market will increase over the next few years. Our survey results over the past two years point to ESG and fixed income as key areas for this growth. As more quantitative corporate disclosure data becomes available, better ESG benchmarks will be created, leading asset managers to create better investment products that reflect investors’ commitments to 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 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
