INVESTMENT

The growth of the sustainable index proves sustainable


Sustainable investment is very much in the minds of investors around the world. This is the main takeaway of the Index Industry Association’s (IIA) fifth annual survey of independent index providers worldwide.

Measuring the number of indices worldwide across asset classes, geographies and categories, the annual IIA Benchmark Survey serves as a useful temperature test for investors worldwide and has led us in an in-depth analysis of emerging areas of investor focus. IIA members operate over 3 million indexes worldwide, and with 9,000 to 10,000 exchange-traded products (ETPs), it is clear that most indicators are used for investment, not for benchmarking products. The unprecedented growth of the Environmental, Social and Governance (ESG) Index in recent years and the ongoing expansion of the Sustainable Income Index have created more tools for benchmarking and will provide better tools for asset managers to create better investment products for investors.

The results of this year’s survey show that the light is still green for ESG or sustainable investment. The number of ESG benchmark indicators has increased by 43%. This is a record year after year (YoY) growth for any sector in the survey and tops the growth of 40.2% from 2019 to 2020. From the perspective, most categories vary between 5% YoY.

Not surprisingly, however, recent survey results, combined with other IIA studies, confirm an ongoing and accelerated trend that we have observed over the past few years. As investors around the world embrace sustainable investment strategies and regulators and policymakers sharpen their focus on ESG-related issues, the demand for reliable ESG market systems has increased. And index providers have taken steps to meet that demand.

Rising eye-popping ESG indices over the past several years have inspired us to launch the first annual ESG survey of IIA’s global asset managers earlier this year. The inaugural survey gathered perspectives on a range of ESG-based topics from about 300 asset managers in the United States and Europe. It was found that 85% of these managers see ESG as a high priority for their company. ESG priority driving asset allocation, the proportion of ESG assets in the global portfolio operated by this group is expected to increase from 26.7% in 12 months to 43.6% in five years.

With greater ESG adoption, investors want better tools to measure their ESG investments. The lack of quantitative data was cited by 63% of those surveyed as a challenge to ESG implementation. The results of this year’s IIA benchmark survey support these findings: Asset managers desperately want more ESG indicators in the asset class outside of equity.

Investor confidence is another key factor in the rapid expansion of the ESG index in the market. According to our ESG survey, 80% of respondents believe that the indicators indicate rapid investment in companies and sectors with their strong ESG effectiveness. Another 73% believe that the indicators improve ESG performance comparatively and 78% say that the indicators increase their confidence in the reliability of ESG data. Among the rapidly evolving nature of many ESG problems, three-quarters of respondents found that indicators help them respond quickly to new ESG concerns.

Outside of the ESG, our benchmark survey has revealed some additional areas for index expansion. Again, in response to the application of multi-asset strategies among investors, the number of fixed-income market measuring indices has increased by about 8% YoY. It has picked up 7.1% growth in 2020.

For ESG and fixed income, the survey found 61% higher ESG indicators than fixed-income. In addition to the high-yielding bond index and the total market or composite bond index, there was also an impressive increase in fixed-income indices in the United States.

Chart 8 illustrates the fixed-income highlights from the IIA benchmark survey

Among the equity segments, the sum of the thematic indicators showed the only strong growth other than ESG, with a 27.5% YoY increase, albeit from a smaller base. This represents a shift in emerging investment trends among investors towards better thematic investment approaches away from smart beta.

If you believe that there is a gap between creating an index like mine and developing and selling this type of product to investors, then the amount of product that the product asset manager will bring to market will continue to grow over the next few years. The results of our survey over the last two years point to ESG and fixed income as the key areas for this growth. The more quantitative corporate disclosure data becomes available, the better the ESG benchmark will be created, which will lead asset managers to create better investment products that reflect investors’ commitment to sustainable financing.

This is the fifth installment of a seriesFrom the Index Industry Association (IIA) IIA will celebrate its 10th anniversary in 2022 For more information, visit the IIA website at www.indexindustry.org

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All post author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / Aaron McCoy


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Rick Redding, CFA

Rick Redding, CFA, CEO of Hall Index Industry Association (IIA), is the first trade group for independent index providers worldwide. Prior to his role with IIA, Redding served as Managing Director at CME Group and in various senior positions as a product innovation guide.



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