Growth in Sustainable Indices Proves Sustainable

Sustainable investing could be very a lot on the minds of buyers 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 lessons, geographies, and classes, the annual IIA Benchmark Survey serves as a helpful temperature examine for international buyers 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 progress in environmental, social and governance (ESG) indices and ongoing growth in fixed-income indexes lately has created extra instruments for benchmarking and can present asset managers higher instruments to create higher funding merchandise for buyers.

This yr’s survey outcomes present the sunshine for ESG, or sustainable investing, continues to be flashing inexperienced. The variety of indices measuring ESG standards jumped by 43%. That’s a report year-over-year (YoY) enhance for any sector within the survey and comes on prime of a 40.2% rise from 2019 to 2020. For perspective, most classes change inside 5% YoY.

Whereas not shocking, the most recent survey findings, mixed with different IIA analysis, verify an ongoing and accelerating development we’ve noticed in the previous few years. As international buyers embrace sustainable investing methods to an ever better extent and regulators and policymakers sharpen their give attention to ESG-related points, the demand for dependable ESG market measures has soared. And index suppliers have stepped in to satisfy that demand.

Eye-popping ESG index progress 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 variety of ESG-oriented matters 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 international portfolios managed by this group anticipated to rise from 26.7% in 12 months to 43.6% in 5 years.

Amid better ESG adoption, buyers 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 lessons past equities.

Investor belief is one other key issue within the fast growth of ESG indices available in the market. In response to our ESG survey, 80% of respondents consider indices assist them direct funding shortly to firms and sectors with robust ESG efficiency. One other 73% consider that indices enhance comparability in ESG efficiency, and 78% say that indices enhance 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 shortly to new ESG issues.

Past ESG, our benchmark survey uncovered some extra areas for index growth. Once more, in a nod to the attraction of multi-asset methods amongst buyers, the variety of indices measuring fixed-income markets elevated by nearly 8% YoY. That eclipsed the 7.1% enhance in 2020.

As for ESG and stuck revenue, the survey discovered 61% extra ESG indices within the fixed-income area. There was additionally spectacular progress 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 robust progress, with a 27.5% enhance YoY, albeit from a small base. This represents one thing of a shift amongst buyers away from good beta towards extra thematic funding approaches to raised entry rising investing developments.

In the event you consider as I do that there’s a lag between the creation of indices and the event and sale of such merchandise to buyers, the variety of merchandise asset managers will convey to market will likely be on the rise for the following a number of years. The outcomes from our surveys the previous two years level to ESG and stuck revenue as key areas for this progress. As extra quantitative company disclosure knowledge turns into obtainable, higher ESG benchmarks will likely be created, which can lead asset managers to create higher funding merchandise that replicate buyers’ commitments to sustainable finance.

That is the fifth installment of a series from the Index Industry Association (IIA). The IIA will have a good time its tenth anniversary in 2022. For extra data, go to the IIA web site at www.indexindustry.org.

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All posts are the opinion of the creator. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the creator’s employer.

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