ESG criteria: Global asset managers are expanding their influence

The variety of environmental, social and governance (ESG) benchmarks and indices in demand by the asset management community has increased at an unprecedented pace over the past two years. This is in accordance with our latest survey of Index Industry Association (IIA) members.. Looking at these high numbers, ESG indices have expanded beyond more traditional areas of integration into recent asset classes and methods.

The IIA surveys our members each fall as a part of our annual benchmark survey to grasp where the index industry’s growth is coming from. Last fall, the IIA found that the variety of ESG indices increased by 85%. within the last two years. In response, we conducted additional surveys of the worldwide asset management community in 2021 and 2022 to substantiate that index providers are meeting the ESG needs of the investor community by assessing impact and monitoring potential barriers to growth.

That’s what drives our recent results ESG Global Asset Manager Survey so interesting. The survey, conducted earlier this 12 months, surveyed 300 mutual fund firms in Europe and the United States. It was noted that the impact of sustainable investment aspects on the worldwide market ecosystem has further accelerated amid geopolitical conflicts, rising rates of interest in lots of countries, a 40-year peak rate of inflation and now fears of recession.

In fact, our survey found that ESG aspects are more essential to global asset managers today than they were a 12 months ago. A whopping 85% of asset managers said ESG had grow to be a greater priority of their firm’s overall investment strategy over the past 12 months.

Overall: Has ESG grow to be roughly a priority in your organization’s overall investment strategy during the last 12 months (by region)?

Given the extensive media coverage of ESG and its aggressive promotion by asset managers, these results are actually not all that surprising. So we delved deeper into our next query and asked asset managers to quantify the combination of ESG points into their portfolios. We wanted to grasp how asset managers view the longer term of asset management. Expectations for ESG portfolio percentages over the following 12 months increased by greater than 13% in comparison with last 12 months’s survey. In addition, asset managers expect that inside 10 years, 64.2% of their portfolios will contain ESG elements. These double-digit percentage increases in comparison with the previous 12 months’s results extend across all time horizons examined.

What percentage of your organization’s asset management portfolios do you think that will contain ESG elements in the longer term?

ESG integration has grow to be so widespread that sustainable investment approaches have expanded beyond stocks to other asset classes. The percentage of investors incorporating ESG aspects into their fixed income allocations rose to 76% this 12 months, in comparison with 42% a 12 months ago. In fact, ESG integration has increased across all asset classes year-over-year, with the biggest expansion seen in fixed income. This trend shows no signs of slowing: over 80% of world asset managers expect the usage of ESG criteria to extend across all major asset classes over the following 12 months.

What explains these results? Based on conversations with market participants, I imagine that higher data has led to higher rankings and more research and development in fixed income, which in turn has provided greater impetus for integrating sustainable investing across asset classes and portfolio holdings.

In which asset classes does your organization currently implement ESG criteria?

This conclusion is not only anecdotal: More than 9 in 10 survey respondents agreed that tools, metrics and services for monitoring environmental impact, social sustainability and company governance are either very or fairly effective. This is a big increase from 66% in 2021.

Of course, given concerns about greenwashing and different data in Eastern, Southern and Western Europe, this result seems optimistic. To date, environmental data is more quantifiable and directly measurable than social and governance data. For example, “E” rankings allow agencies to standardize how emissions are measured across jurisdictions. In contrast, privacy issues make it difficult, if not unimaginable, to gather some social data. More fundamentally, not every country or culture, let alone every individual, agrees on what the precise social priorities ought to be.

But the survey responses suggest something of a paradox: fund managers give broadly equal weight to the E, S and G components, despite the fact that their attitudinal comments suggest that environmental concerns are more essential at this stage of ESG development be more distinguished. In fact, 78% of respondents said that “environmental criteria should always take precedence over social and governance criteria.”

Which of the next statements best describes how each ESG element is integrated into portfolios?

Even in a 12 months of economic and geopolitical challenges, global asset managers expect demand for ESG investing to extend and proceed to expand into additional asset classes. This raises plenty of questions: Will there be enough data to support the increasing demand for ESG-focused indices and tools? Will a worldwide consensus emerge on greater than just the “E” in ESG? That is, is sufficient knowledge of social and governance criteria developed? These are topics we might be keen to regulate in our discussions with global asset managers in the approaching years.

This is the sixth a part of a series from Index Industry Association (IIA). The IIA will have a good time its tenth anniversary in 2022. For more information, visit the IIA website at www.indexindustry.org.

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