The Index industry has a long track record of continuing to evolve and innovate, with the goal of providing ever-increasing options for the public.
When we asked our member firms about the present state of the industry and the biggest opportunities on the horizon, we noticed that one theme that continuously popped up – ESG. The rise of ESG indexes is impossible to ignore. Our 2021 Benchmark Survey found that the number of ESG indices globally rose by 43.2% in the past year — following a 40.2% rise from 2019 to 2020 — continuing its significant growth to meet rising investor demand.
As the IIA celebrates our 10th anniversary, it’s clear our members believe that climate and ESG indexes will meet the needs of investors for years to come.
- From the perspective of index investing trends in the future, ESG is a continued focal point in the market.
Drawing widespread attention of investors worldwide, the ESG investment will remain highly sought-after in the future. At present, the development of ESG investment on a global scale is still unbalanced, as it is mainly concentrated in developed economies. As promoting the “green recovery” of the world economy, reducing greenhouse gas emissions, and achieving sustainable development have been increasingly recognized as the trend of global development, we expect that the ESG indices and index-linked products will also grow rapidly in emerging markets in the future.
- China Securities Index (CSI)
- No doubt we’ll see more growth in ESG, thematic and factor-based strategies. Within the first category, the next stage is to develop indices that go beyond exclusions and best-in-class ESG integration, and that can accurately measure the real-world impact of a portfolio. We are already seeing asset owners customizing their own indices based on this underlying data set from the SDI Asset Owners Platform, a move that is likely to become common in coming years. Increasing demand for ESG objectives, coupled with more regulation, are also putting the spotlight on indices as instruments for portfolio measurement and reporting, not just benchmarking.
- We believe ESG will be the focus of the index industry from 2022 onwards, as we have mentioned at each of our meetings. Index providers are important drivers of ESG investment.
- Shenzhen Securities Information Co. (SSIC)
- There is tremendous opportunity for index innovation in emerging new themes such as sustainability, ESG and digital assets. While these areas are still taking shape, it is clear they will play an important role for the indices of tomorrow.
And while the opportunities for investors are clear, our members also made sure to point out the importance of regulation, standards and clear metrics to ensure index providers are able to provide transparency and reliability to these benchmarks.
- As layers of ESG and climate-disclosure regulations accumulate across different legislative schemes, it is of increasing importance that index providers understand and articulate what their obligations are and to maintain these distinctions, work that the IIA greatly facilitates.
- Although various ESG indices are widely accepted by global investor communities, certain potential problems including “ESG Wash” are pointed out by relevant parties including regulators. The industry is required to address these issues appropriately to protect and promote investors’ interests. In response to the growing awareness for ESG investments across the world, it is expected that the role of the index industry will be expanding dramatically. For the sustainable growth of the world, the industry is required to take positive and proactive role.
- Using transparent ESG ratings and climate metrics that are financially material is a critical element in enhancing investors’ understanding and fostering adoption. Climate change is forward looking by nature, therefore the standard tools of using long historical data to develop and test investment strategies through multiple economic cycles are not applicable. This makes having clear metrics and using forward-looking analysis crucial in forming investment beliefs and adopting appropriate investment strategies that address the transition to a net zero economy.
It’s clear that IIA members will continue to play a critical role in meeting investors preferences for ESG indexes. We will continue to study this trend closely so keep an eye out for our 2nd annual ESG Asset Management Survey, coming later this summer.