Sustainable investing could be very a lot on the minds of traders throughout the globe. That’s the important thing takeaway from the Index Industry Association (IIA)’s fifth annual survey of global independent index providers.
By measuring the variety of indices world wide from throughout asset courses, geographies, and classes, the annual IIA Benchmark Survey serves as a helpful temperature examine for world traders and has led us into deeper evaluation of rising areas of investor focus. IIA members proceed to manage over 3 million indices globally and, with 9,000 to 10,00 exchange-traded merchandise (ETPs), it’s clear most indices are used for benchmarking functions not for merchandise for funding. The unprecedented development in environmental, social and governance (ESG) indices and ongoing enlargement in fixed-income indexes in recent times has created extra instruments for benchmarking and can present asset managers higher instruments to create higher funding merchandise for traders.
This yr’s survey outcomes present the sunshine for ESG, or sustainable investing, remains to be flashing inexperienced. The variety of indices measuring ESG standards jumped by 43%. That’s a report year-over-year (YoY) improve for any sector within the survey and comes on high of a 40.2% rise from 2019 to 2020. For perspective, most classes change inside 5% YoY.
Whereas not stunning, the most recent survey findings, mixed with different IIA analysis, affirm an ongoing and accelerating development we’ve got noticed in the previous few years. As world traders embrace sustainable investing methods to an ever higher extent and regulators and policymakers sharpen their deal with ESG-related points, the demand for dependable ESG market measures has soared. And index suppliers have stepped in to fulfill that demand.
Eye-popping ESG index development over the previous a number of years impressed us to launch the IIA’s first annual ESG survey of global asset managers earlier this yr. The inaugural survey gathered views on a spread of ESG-oriented subjects from about 300 asset managers in america and Europe. It discovered that 85% of those managers view ESG as a excessive precedence for his or her firms. ESG prioritization is driving asset allocation, with the proportion of ESG belongings in world portfolios managed by this group anticipated to rise from 26.7% in 12 months to 43.6% in 5 years.
Amid higher ESG adoption, traders need extra and higher instruments to measure their ESG investments. Lack of quantitative knowledge was cited as a problem to ESG implementation by 63% of these surveyed. This yr’s IIA Benchmark Survey outcomes help these findings: Asset managers overwhelmingly need extra ESG indices in asset courses past equities.
Investor belief is one other key issue within the speedy enlargement of ESG indices available in the market. In keeping with our ESG survey, 80% of respondents imagine indices assist them direct funding rapidly to firms and sectors with sturdy ESG efficiency. One other 73% imagine that indices enhance comparability in ESG efficiency, and 78% say that indices improve their confidence in ESG knowledge’s reliability. Amid the fast-evolving nature of many ESG points, three quarters of respondents discover that indices assist them reply rapidly to new ESG issues.
Past ESG, our benchmark survey uncovered some further areas for index enlargement. Once more, in a nod to the enchantment of multi-asset methods amongst traders, the variety of indices measuring fixed-income markets elevated by virtually 8% YoY. That eclipsed the 7.1% improve in 2020.
As for ESG and glued earnings, the survey discovered 61% extra ESG indices within the fixed-income house. There was additionally spectacular development in high-yield bond indices and complete market or composite bond indices, in addition to fixed-income indices within the Americas.
Amongst equities classes, the thematic indices cohort was the one one apart from ESG to show sturdy development, with a 27.5% improve YoY, albeit from a small base. This represents one thing of a shift amongst traders away from sensible beta towards extra thematic funding approaches to raised entry rising investing traits.
Should you imagine as I do that there’s a lag between the creation of indices and the event and sale of such merchandise to traders, the variety of merchandise asset managers will convey to market will probably be on the rise for the subsequent a number of years. The outcomes from our surveys the previous two years level to ESG and glued earnings as key areas for this development. As extra quantitative company disclosure knowledge turns into obtainable, higher ESG benchmarks will probably be created, which can lead asset managers to create higher funding merchandise that mirror traders’ commitments to sustainable finance.
That is the fifth installment of a series from the Index Industry Association (IIA). The IIA will rejoice its tenth anniversary in 2022. For extra info, go to the IIA web site at www.indexindustry.org.
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