The top priority for index providers over the next 12 months should be driving innovation on ESG, according to a survey of 300 asset managers.
Advanced analytics and data services represent the second most frequently mentioned need, while asset managers also indicated wanting to see more application of artificial intelligence (AI) and more use of technology innovations.
In its latest annual research, the Index Industry Association (IIA) suggested that investors may have previously been “overoptimistic” about the future of ESG investing, but that the topic “still looms large in asset managers’ strategic goals”.
Survey respondents consisted of 80 chief financial officers, chief investment officers and portfolio managers from each of the UK and the US, and 70 from each of Germany and France.
On average, the institutions represented used four different index providers each, although 39% use five or more.
“When surveyed in 2021, asset managers were forecasting that ESG would account for about 35% of portfolios by the end of the three-year time horizon,” said IIA, the trade body for the index industry.
“In our 2022 and 2023 surveys, forecasts of ESG investing spiked up,” the IIA stated, adding: “However, in 2024 expectations have adjusted again, in a manner that is more consistent with the profile of future of ESG investing that was expected in 2021.”
Nearly 60% said the top motivation for pursuing ESG and sustainability was client demand.
Reshuffle of ESG priorities?
When asked about the biggest expected drivers of investment performance over the coming 12 months, asset managers put climate change tenth, out of 11 factors.
Interest rates and inflation, economic slowdown and elections were the top picks. War and conflict came in fourth, followed by technological advancements, political unrest, regulation and supply chain disruptions.
The IIA also highlighted “a disconnect” when it came to how ESG issues were prioritised. Almost half (46%) of asset managers said green issues tended to dominate the three pillars, but less than a third (32%) through this should be the case – falling to 18% in the US.
“This likely points to further reconfiguration of asset portfolio compositions in the period ahead,” suggested the report.
Asked where they want index providers to focus over the next 12 months, asset managers said ESG and sustainability criteria were the most important area.
Beyond ESG
Beyond ESG, the IIA said the research shone a light on the challenges being faced by asset managers and their index providers, including the technological transformation driven by AI, and the growth of new markets and asset classes.
“While each of these forces has its own drivers and momentum, together they add up to an asset management environment of growing complexity and sharply diverging patterns of risk and opportunity.”
A significant number of survey respondents noted that they expected to increase their allocation to fixed income, listed equities and hedge funds over the next 12 months.
Private equity, venture capital and commodities are also expected to see an uptick, while real estate, money markets and crypto are falling out of favour, according to the research.
Artificial intelligence
The IIA said its research showed asset managers “are enthralled by the possibilities afforded by generative AI”. Two-thirds indicated that generative AI/machine learning was the topic raised most frequently by their firms and colleagues over the past 12 months.
Around two-thirds (65%) of firms are seeing generative AI as an opportunity rather than a challenge (14%) for their business practices. For those seeing it as an opportunity, 58% said this was because of its potential to turbocharge operational efficiency, and 45% said it was because it could benefit investment performance.
Encouraging innovation was seen as a benefit by half of respondents.
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