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ESG Investing / Asset Management
Bespoke benchmarks tackle evolving ESG demands
Partnerships, collaborations key to future of ETF development
The Asset 23 Feb 2021

The push to meet the needs and allay the concerns of environmental, social, and governance (ESG)-focused investors is driving index providers and asset managers in Europe to develop bespoke benchmarks in partnership with other firms, according to a recent report.

“Traditionally, any manager launching an exchange-traded fund (ETF) would have to license the index it wished to track and then replicate it as an investment portfolio,” says Fabrizio Zumbo, associate director of European asset and wealth management research at Cerulli Associates, which published the report. “However, the relationship between index providers and asset managers is changing, with some managers developing bespoke benchmarks in partnership with other companies.”

In 2020, MSCI entered into a partnership with a leading asset manager to launch a sustainable range and expanded its partnership with a financial data and analytics firm to launch three groups of sustainable fixed-income benchmarks. It added eight climate-themed indices designed to help investors align their portfolios with the goals of the 2015 Paris climate agreement.

Meanwhile, Morningstar has fully integrated Sustainalytics’ data and analysis into all ratings and benchmarks, following its acquisition of the ESG ratings and research provider. And smaller index providers are also gaining traction. German company Solactive has added new indices and services through partnerships and investments in smaller firms.

At the same time, some large players are switching index providers with the aim of reducing costs and increasing profit margins, because managers that use their own indices are able to reduce the amount they pay to third-party index providers in licensing fees. Ultimately, they could be more in line with the specific and tailored exposure requested by investors.

“As the quality of data improves and technology makes it easier to process and analyze non-financial information, index providers are bringing in new ESG-themed benchmarks,” Zumbo says.

However, only 19% of the ETF issuers surveyed last year in the report expect to develop a self-indexing proposition, even though 57% see it as an opportunity. Some of the managers were cautious about self-indexing because benchmark regulations are in place to mitigate conflicts of interest.

The report also noted that record-high net inflows to European funds of €91.5 billion (US$110.8 billion) were registered in December, a 32% month-on-month increase. The bulk of inflows to actively managed funds can be attributed to equity funds, especially global equities, which attracted €11.4 billion during December and €34.8 billion during the year. Thematic equity funds were the winners in 2020 in terms of sales.

Passively managed assets in Europe ended 2020 on a high note, attracting €29.4 billion of net inflows during December, an increase of 23% month-on-month. Overall, passively managed assets registered positive net flows of €147 billion, outstripping actively managed assets, which attracted net inflows of €66.5 billion during the year. ETFs in Europe attracted €22.5 billion in net sales in December and €93.8 billion for the year.

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