Index Industry
Association 2023
ESG survey

Index Industry Association 2023 Report | 1

TABLE OF CONTENTS

Introduction ........................................................................................................................................................................................................................................................... 3
Main Findings ......................................................................................................................................................................................................................................................... 5
ESG continues to grow in the face of political and geopolitical headwinds .................................................... 7
Tools and metrics: much better, but gaps remain ................................................................................................................................... 10
Emerging tech could be a game changer .............................................................................................................................................................. 12“E” is no longer just carbon .......................................................................................................................................................................................................... 14
Widening lens on social factors ............................................................................................................................................................................................ 16
Governance is getting attention ........................................................................................................................................................................................... 19
ESG drivers are multifaceted ..................................................................................................................................................................................................... 21
ESG asset class expansion continues, driven by signi昀椀cant growth in commodities ................. 23
Trust: high, but some slippage ................................................................................................................................................................................................ 26
Policies have consequences ...................................................................................................................................................................................................... 28
Conclusion ............................................................................................................................................................................................................................................................... 30

Index Industry Association 2023 Report | 2

INTRODUCTION
Recent years have been a rollercoaster ride for many aspects of environmental, social and governance(ESG) investing, with investors buffeted by economic uncertainty, geopolitical upheavals, and a raftof policy shifts on both sides of the Atlantic. During this time ESG flows have touched historic highs,
but have also suffered periodic setbacks and reversals. Since 2021 the Index Industry Association has
been testing the pulse of asset managers on ESG trends through an annual survey of 300 CFOs, CIOs
and portfolio managers across France, Germany, the UK, and the US. The 2023 survey, the third in arow, offers a unique glimpse into what this influential cohort is thinking about ESG investing.
Our 2023 survey also starts to address some of the many unanswered questions around the futureof ESG investing. How are asset managers seeing new and emerging dimensions of ESG investing?
Is the ESG data gap being narrowed and which gaps still need to be addressed? How will the shifting
policy sands and political rhetoric both domestically and internationally influence the views andactions of asset managers? Will emerging technologies such as AI and blockchain be a game changer
for ESG measurement and investing, or will they introduce new challenges of their own?
As before, this year’s survey was carried out by Opinium, with 昀椀eldwork taking place in March andApril 2023. The sample consisted of 80 CFOs, CIOs, and portfolio managers from each of the UK and
the US, and 70 from each of Germany and France. The survey covers some of the largest 昀椀rms in theindustry: in the case of respondents from French and German companies, 22% had assets-undermanagement (AUM) between Euro 101bn to Euro 500bn, while 14% had an AUM of Euro 501bn ormore. By role, just under half (49%) of respondents were portfolio managers or equivalent, with 29%
being Chief Financial Of昀椀cers (CFO) and 23% Chief Investment Of昀椀cers (CIO). The France sample hada relatively higher proportion of portfolio managers (63%), while the Germany sample had a somewhat
higher representation of CFOs (39%).

Index Industry Association 2023 Report | 3

Figure 1: Distribution of French and German companies by size of assets-undermanagement (AUM), 2023

Less than €100m

2% 2%
12% 1%
9%€100m to €500m€501m to €1bn
€1bn to €10bn

22%
19%

€11bn to €50bn€51bn to €100bn€101bn to €500bn

17%€500bn to €1trn

16%More than €1trn
Base: French & German
respondents (n140)

Figure 2: Distribution of survey respondents by role, 2023

29%
Portfolio manager

49%

CFO
CIO

23%

Base: All respondents (n300)

Index Industry Association 2023 Report | 4

MAIN FINDINGS•

Fund managers continue to see growth in the face of political and geopolitical
headwinds: Despite signi昀椀cant economic volatility and political frictions, asset managers inFrance, Germany, the UK and US are ramping up their ESG investments. Eight in ten (81%) of asset
managers say ESG has become more (54%) or much more (28%) of a priority to their investment
strategy over the past 12 months, a similar proportion to our 2022 survey. ESG investing remains
on course to reach almost half of portfolios in 2-3 years’ time, and to reach 63% in ten years.

•

US asset managers pushing ahead: : Despite a series of political headwinds, ESG still
enjoys commanding support among US fund managers, with 88% (the joint highest region) saying it
has become more of a priority over the last year.

•

Tools and metrics much improved, but gaps remain: Asset managers see big
improvement in ESG tools and metrics, with 85%-87% viewing these as fairly or highly effective,
compared with only 66%-69% in 2021. However, gaps remain, especially around lack of data
standardization (30%), insuf昀椀cient quantitative data (29%), and lack of agreed ratings andmethods by providers (24%).

•

Emerging technologies promise to be a game changer: Asset managers see
emerging technologies—analytics, Internet of Things, blockchain, AI and machine learning, andothers—offering unprecedented opportunities to close the data gap, improving the timing, depth
and predictive content of ESG data and metrics. US asset managers are especially attuned to thepotential ESG applications of AI and machine learning, with almost half (48%) expecting it to havethe biggest impact on ESG measurement and reporting over the next two years.

•

ESG asset class expansion continues, driven by signi昀椀cant growth incommodities: Commodities ESG investing has burst out of the blocks, with the proportion ofcompanies implementing ESG criteria for commodities rising from 37% in 2021, to 47% in 2022, and toa dramatic 62% in 2023. Commodities ESG investing is being propelled by asset-manager concern for
ESG factors (31%), reputation or regulatory risk (27%), and high energy prices (26%).

•“E” is evolving beyond just carbon: Asset managers are now taking an expansive viewof environmental ESG issues, which are no longer solely about climate change and carbon
emissions. Asset managers highlight natural resource usage or depletion (42%), sustainablesupply chains (39%), resilience of physical assets to climate change (38%) and greenhouse gas /carbon emissions (32%) as being most important to their ESG investing strategies.

Index Industry Association 2023 Report | 5•Widening lens on social factors: Sixty-two percent of asset managers incorporate societal
factors as a core part of all or part of most portfolios, with US managers (74%) more likely to doso than those in other regions. Big societal issues include the impact of supply chains (38%),
safety and product quality (37%), diversity and inclusion (34%), and data protection and privacy(32%). However, the wide-ranging and intangible nature of S factors creates challenges for asset
managers: over half (54%) 昀椀nd it dif昀椀cult to evaluate the social and governance performance ofcompanies, and a similar proportion (56%) say they are 昀椀nding it dif昀椀cult to keep up with changing
societal views and expectations around ESG.

•

Governance is getting attention: Asset managers are taking notice of corporate
governance: what 昀椀rms do, how they do it, and with whom. In their ESG investment decisions, they
are paying special attention to fair business practices (41%), accounting transparency (39%), anddiversity among boards and leadership (35%), among a host of other factors.

•

Policies have consequences: Asset managers are pivoting rapidly in response to bothinternational and domestic policy shifts: 73% say that the UN 2022 Global Biodiversity agreement
will have a major or some impact on their ESG investing strategy; 88% of US managers highlightthe impact of new SEC proposals for greater ESG disclosures; two thirds of EU managers expect
the EU Sustainable Finance Disclosure Regulation (SFDR) to have a signi昀椀cant impact on theirinvestment strategy. Over half of EU companies have already reclassi昀椀ed funds between Article 8(“light-green funds”) and Article 9 (“dark-green funds”) in response to SFDR regulation.

Index Industry Association 2023 Report | 6

ESG CONTINUES TO GROW IN THE FACE OF
POLITICAL AND GEOPOLITICAL HEADWINDS
The last year has been a testing period for ESG investing, beset by economic turbulence, geopoliticalinstability and, in some quarters, political skepticism. According to Morningstar data, global
sustainability funds net inflows slumped in the middle quarters of 2022, before recovering to USD
29bn in the 昀椀rst quarter of 2023. Global sustainability fund assets stood at USD 2.74trn in the 昀椀rst
quarter of 2023, just off the USD 3trn highpoint recorded at the end of 2021. There were, however,marked regional differences: Europe sustainability fund flows grew by USD 32.3bn in the 昀椀rst quarterof 2023, while US flows contracted by USD $5.2 bn.1
Yet our 2023 survey indicates that asset managers’ demand for ESG continues despite these turbulent
times. Four 昀椀fths (81%) of asset managers say ESG has become more (54%) or much more (28%) of apriority to their overall investment strategy over the past 12 months. The growing prioritization of ESG
was a common theme across regions, although somewhat weaker in Germany, where 67% indicated
ESG to be of growing priority, compared with 21% who said it had become less of a priority. Despite
the ongoing political debate in the US, ESG still commands overwhelming support among US asset
managers, with 88% (the joint highest region with the UK) saying that it has become more of a priority.
One US CIO remarked: “I think there will be an increase in the importance of ESG over the next 昀椀ve years
as the effects of climate change, societal upheaval, and poor corporate governance become more
apparent and affect returns.” A US portfolio manager attributed renewed ESG buoyancy to wider forcesat play: “Over the next 昀椀ve years, ESG investing is likely to become increasingly mainstream and this isdue to a combination of technological developments, regulatory changes, and shifts in client demands.”
While the relative prioritization of ESG was generally high across funds of different sizes, the verylargest funds (USD 101bn or more) were somewhat less likely to say that it had increased in priority(65% compared with 86% of 昀椀rms in the USD 51bn to USD 100bn category), although this may simply
reflect the already high degree of ESG integration for these companies.

Four in 昀椀ve asset managers say ESG has
become more of a priority to their overall
investment strategy over the past 12 months.

1

“

“

Morningstar, April 25 2023, Global Sustainable Fund Flows: Q1 2023 in Review.

Index Industry Association 2023 Report | 7

Figure 3: Extent to which ESG has become more or less of a priority to companies’
overall investment strategy over the past 12 months, 2022 and 2023

80%

60%

19%

40%

24%

20%

0%
More of a priority

Less of a priority2022

No change2023

Base: All respondents 2022 (n300), All respondents 2023 (n300)

How is this renewed momentum likely to translate into ESG portfolio investment in the future? Using
our three years of survey data, Figure 4 plots the expectation curve showing investors’ estimates ofthe future proportion of ESG elements in their portfolios at periods of 12 months, 2-3 years, 5 昀椀ve
years, and 10 years ahead. In 2021 asset managers expected ESG to account for 26.5% of portfolio
assets by the following year, rising to 34.7% in 2025, 43.1% by 2026, and 52% by 2031 (shown by
the blue line). In 2022, the ESG expectations curve shifted up signi昀椀cantly (as shown by the orangeline), with asset managers forecasting ESG elements to reach 63.9% by 2032. In the case of our2023 survey, medium-term expectations for ESG portfolios (as shown by the grey line) have slightly
dipped compared to 2022 expectations—undoubtedly reflecting recent turbulence in ESG markets—
but nevertheless retain a strong upward trajectory with the proportion of ESG elements in portfolios
reaching 62.6% by 2033.

Index Industry Association 2023 Report | 8

Figure 4: Expected average future share of asset portfolios that will contain ESG
elements, as forecast in 2021, 2022, and 2023 surveys (%)

60%

50%

40%

30%

20%

2022

2023

2024

2025

2021 Survey

2026

2027

2022 Survey

2028

2031

2032

2033

2023 Survey

Base: All respondents 2021 (n300), All respondents 2022 (n300), All respondents 2023 (n300)

Note: Respondents were asked in the 2021, 2022, and 2023 surveys to estimate the proportion of
portfolio assets that would contain ESG elements in one year’s time, 2-3 years ahead, 5 years ahead,
and in 10 years.

Index Industry Association 2023 Report | 9

TOOLS AND METRICS: MUCH BETTER,BUT GAPS REMAIN
The vast majority (85%-87%) of asset managers see ESG tools and metrics as fairly or highly effective,
but gaps remain. While perceived effectiveness dropped back slightly compared to 2022, this year’s
results represent a major improvement on 2021, when only 66%-69% of asset managers saw thesetools and metrics as effective.
Within this overall picture of improvement, environmental impact tracking tools, metrics and services weremore likely to be ranked as fairly effective (58%) than highly effective (27%). In comparison, over two in 昀椀veranked social sustainability and corporate governance tools as highly effective (44% for each). While thereason for this difference is not entirely clear, it may simply reflect greater familiarity with environmental
tools, or possibly an expectation that such tools should be more advanced given the generally morestraightforward nature of environmental issues compared with those in the social and governance arenas.
While the ESG data vacuum identi昀椀ed in our 2021 report may be diminishing, it has not gone away
and signi昀椀cant challenges still remain. Amongst the biggest challenges, lack of data standardization
across markets (30%), insuf昀椀cient quantitative data (29%), and a lack of agreed ratings and methods byproviders (24%) continue to frustrate the search for more accurate, relevant and timely measurement(Figure 5). Notably, these speci昀椀c data challenges have not signi昀椀cantly diminished since our 2022
survey, suggesting that many aspects of measurement remain stubbornly resistant to improvement.

Figure 5: Biggest challenges to ESG implementation for asset and fund managers, 2023

Need ESG in more asset classes
Lack of sector data standardization
Lack of quantitative data
Insufficient corporate ESG disclosures
Lack of timely company measurement
Lack of management buy-in
Lack of agreed ratings and methods
Need more choices of index vehicles
Lack of regulatory certainty
Lack of client demand
Lack of transparency
0%

5%

10%

15%

20%

Base: All respondents 2023 (n300)

Index Industry Association 2023 Report | 10

25%

30%

35%

40%

Lack of transparency is a recurring theme around ESG metrics, but can cover a multitude of different
issues—methodology, data sources, etc.—as well as many different players in the ESG data supply
chain—companies, ratings agencies, indexes, third-party data providers, and so on. The evidence
indicates that transparency has not improved since 2021, when 25% of asset managers highlighted
insuf昀椀cient public corporate disclosures of ESG activities as a major challenge to ESG implementation,and 18% pointed to more general issues of methodological transparency as a major challenge.
To provide a more granular view of transparency, our 2023 survey for the 昀椀rst time asked asset
managers who indicated lack of transparency as a challenge to pinpoint the sources of such concerns(Figure 6). The answers vary to some extent depending on the stage of ESG metric development.
For ESG de昀椀nition and scope, asset managers were most likely to identify ratings agencies as thesource of inadequacies (39%), although they saw issues generally across the board. For measurement
methods, company data collection and Index providers were identi昀椀ed as potential sources of lackof transparency, whereas for weighting attached to models, ratings agencies and company datacollection were most frequently mentioned. However, to put this in context, only 22% of assets
managers identi昀椀ed lack of transparency as a major challenge, and data transparency issues weregenerally seen as having a fairly broad provenance across different sources.

Figure 6: Areas where inadequacies in methodological transparency come from, 2023
ESG de昀椀nitions
and scope

Data sources
and coverage

Measurement
methods

Weightings
attached tomodelsRatings
Agencies

39%

35%

33%

44%

Index
Providers

33%

33%

35%

27%

Fund
Management

33%

32%

29%

33%

Company Data
& Collection

29%

32%

36%

39%

ReportingBodies

26%

29%

26%

21%

Base: Respondents who see a lack of transparency as a challenge to ESG implementation (n66)

Index Industry Association 2023 Report | 11

EMERGING TECH COULD BE A GAME CHANGER

Emerging ESG technologies are growing in speed, accuracy, and maturity—and asset managers aretaking notice. One US Portfolio manager observed: “Arti昀椀cial intelligence capabilities will improve
the timing and depth of ESG investment regulation and disclosure.” A UK CFO commented: “(With)
technological advancements such as AI, machine learning, and predictive analytics, investors will beable to evaluate ESG criteria in an increasingly sophisticated manner.”
Certainly, many applications to ESG investing are now possible. Machine-learning algorithms, forexample, can analyze reams of digitized pages from company annual reports, 昀椀nancial disclosuresand media stories to help analysts track performance against key ESG metrics. Internet-of-things
sensors can collect real-time environmental data from factories, machines, and infrastructure. Geospatial technologies can be deployed to visually identify physical-asset vulnerabilities. Blockchain
technologies can be used to verify sourcing in far-flung supply chains. Public cloud platforms
increasingly help companies measure their Scope 1, 2 and 3 carbon emissions from computing
infrastructure. Many other applications seem possible, especially with the advent of generative AI
systems that can create structured analysis, insights and images from vast tracts of data.
Our 2023 results underline the importance of new technologies in narrowing the data vacuum (seeFigure 7). Perhaps surprisingly, despite the recent hype around generative AI, machine learning was
ranked somewhat behind other technologies such as big data analytics and internet of things. The
exception was the US, where AI was the top technology, cited by 48% of 昀椀rms.

“

Emerging ESG technologies are growing inspeed, accuracy, and maturity—and asset
managers are taking notice.

“

Index Industry Association 2023 Report | 12

Figure 7: Technologies that asset managers expect to have the biggest impact on ESG
measurement and reporting over the next two years, 2023

Big data analytics
Internet of Things
Geospatial technologies
Blockchain/Ledger
Cloud computing
Open-source technologies
AI / machine learning
0%

10%

20%

30%

40%

50%

Base: All respondents (n300)

The perceived potential of emerging technologies varies considerably according to the type of fundand how asset managers implement ESG. Asset managers identifying blockchain / distributed ledger
technology as high potential, for example, are more likely to be those who are also implementing ESG
in 昀椀xed-income assets (85%): possible applications could include use of blockchain for veri昀椀cationof micro-lending or trade and supply-chain 昀椀nance. Asset managers focused on Internet of Things
technologies are more likely to be those using indexes for measurement and benchmarking purposes(49%) than for investment strategies (25%). Asset managers seeing the potential of AI and machinelearning are also overwhelmingly those who are implementing ESG in actively managed portfolios(80%, compared with 57% of the AI group who are doing ESG in quantitative portfolios). Assetmanagers seeing high potential in geospatial technologies are especially likely to be those running
ESG in active exchange-traded funds (ETFs, 86%) and quant strategies (74%).
Our survey results also provide some early suggestive evidence that emerging technology adoption
could lessen the analytical and implementation effort around ESG. For example, those asset managers
who see high potential in AI and machine learning (and, arguably, have a higher propensity to use it)were more likely than the general sample to disagree (28% versus 21% total) that they were 昀椀nding it
hard to keep up with new ESG regulations; and they were also more likely to disagree that they found it
hard to keep up with changing societal expectations around ESG (23% versus 17% for total).

Index Industry Association 2023 Report | 13

“E” IS EVOLVING BEYOND JUST CARBON

As in previous years, assets managers still generally prioritize the “E” part of ESG in their portfolio
allocation decisions. Three quarters (75%) agree that environmental criteria almost always tend to
be prioritized over social and governance criteria for ESG investing, and the same proportion (75%)
agree that that the E should be prioritized. What is changing is that, for asset managers, environmental
factors are increasingly multi-grained and no longer synonymous with just climate change or carbon
footprints. Natural resource usage or depletion (42%), sustainable supply chains (39%), and resilienceof physical assets to climate change (38%) rank above greenhouse gas / carbon emissions (32%) in
terms of importance to ESG investing strategies (Figure 8). Biodiversity (30%) and waste generation(27%) also 昀椀gure prominently.
While the evidence suggests that asset managers are now taking a broader and more nuanced
view of environmental issues, the extent to which this view translates into portfolio allocations may
be more limited. Just over two thirds (67%) of companies say that most of their portfolios are still
climate-only, an improvement on the 74% of companies whose portfolios were climate-only in 2022.
Although this strategic assessment of environmental factors did not vary greatly by country, US
asset managers (Figure 8) put natural resource depletion as their top environmental factor (47%),
followed by sustainable supply chains (44%) and physical-asset resilience to climate change (42%).
This prioritization may reflect a more business-tinted view of environmental factors in the US, where
the increasing occurrence of extreme weather events such as tornadoes and winter storms in recent
years has caused signi昀椀cant disruption to many areas of production and distribution, as well as costly
damage to physical assets such as warehouses and infrastructure.

Index Industry Association 2023 Report | 14

For UK asset managers, reputation and regulatory risks remained the top factor, cited by 44% of
respondents. In contrast to their US counterparts, UK respondents were less likely to rank natural
resource usage (32% UK vs. 47% US) and sustainable supply chains (29% UK vs. 44% US) as
prominent factors to their ESG strategy.

Figure 8: Environmental factors that are most important to companies’ ESG strategies,
2023

Reputational andregulatory risks

Natural resource
usage or depletion

Sustainablesupply chain

Resilience ofphysical assets

24%

Greenhouse gas
emissions

Biodiversity / Habitats

Waste generation

Air pollution

Water pollution

0%

10%

Total

20%

US

UK

30%

FranceBase: Respondents that implement ESG criteria in portfolios, US (n72), UK (n75), FR (n58), DE (n65)

Index Industry Association 2023 Report | 15

40%

Germany

50%

WIDENING LENS ON SOCIAL FACTORS

Social issues are now front-of-mind for many asset managers. In the words of a UK portfolio manager:“Past ESG investments have focused on the environment and governance, but future investments
will increasingly focus on social issues.” A US portfolio manager remarked that: “The scope of ESG
investment will expand beyond environmental protection and may include aspects such as humanrights.” Others see social factors driving long-term value: “Emphasizing ESG and social value, many
investment institutions have started to use social impact as a valuation indicator.”
Our survey data underlines the extent to which social factors are now 昀椀rmly embedded in portfolios.
More than three 昀椀fths of asset managers (62%) indicate that social criteria are a core part of all orpart of most portfolios, a slight decline from the 69% rate recorded in 2022 (Figure 9). However,there are some signi昀椀cant regional differences. US asset managers (74%) are much more likely toincorporate social criteria in ESG compared to asset managers in other regions, notably in the UK
where only 52% do so. Again, this illustrates the extent to which US ESG investing remains robust evenin the face of signi昀椀cant political pressures. Asset managers from the larger funds (101bn or more),thoseimplementing ESG in commodities, and those using indexes for investment strategies were more
likely to see social criteria as a core part of all portfolios.
While societal factors are now 昀椀rmly embedded within ESG strategies, it is also true that the
disparate and amorphous nature of S factors creates challenges for 昀椀rms: over half (54%) of asset
managers 昀椀nd it dif昀椀cult to evaluate the social and governance performance of companies, and asimilar proportion (56%) say they are 昀椀nding it dif昀椀cult to keep up with changing societal views andexpectations around ESG.

“This year’s data underlines the extent
to which social factors are now 昀椀rmly
embedded in portfolios.

“

Index Industry Association 2023 Report | 16

Looking at “social asset managers” speci昀椀cally, current tools appear satisfactory: 89% of those forwhom ESG social metrics are a core part of portfolios say that current social sustainability tracking
tools, metrics and services are fairly (43%) or very (46%) effective, broadly on par with environmental
and governance tools and metrics. Yet asset managers worry about their future robustness: 31% of“social ESG” asset managers strongly agree that they are 昀椀nding it dif昀椀cult to keep up with changing
societal views and expectations around ESG (compared with 24% for all); and 44% of those who saysocial criteria are part of most portfolios strongly agree that they will have to invest more in their ESG
capabilities in coming years due to new ESG regulations (compared with 33% for all).

Figure 9: Extent to which social factors are incorporated into ESG strategies, 2023

100%

80%

60%

40%

24%

20%

0%
Total

Net: All or mostUS

Net: Part of someor only certainUK

Not part of any

FranceGermany

Finds it hard to distinguishbetween the 3 factors

Base: Implements ESG criteria in portfolios, all respondents (n297), US (n78), UK (n79), FR (n70), DE (n70)This year, for the 昀椀rst time, our survey of asset managers also sought to drill down further into thesocietal factors that are most important to companies’ ESG strategies. The results reveal a panoplyof diverse issues, with supply chain management (ensuring these are free from unethical practices)(38%), safety and quality (37%), diversity and inclusion (34%), and data protection and privacy (32%)
heading the list (Figure 10). The results were generally similar across regions, although UK asset
managers were more likely to highlight equal employment opportunities (39%) compared to otherregions.

Index Industry Association 2023 Report | 17

Figure 10: Social factors that are important to ESG strategy, 2023

Supply chain management
Safety and quality
Diversity and inclusion
Data protection and privacy
Training and upskilling
Health and safety
Local / Community investment
Equal employment opportunities
Labor standards
Human rights
0

5

10

15

20

25

Base: Implements social criteria in portfolios (n268)

Index Industry Association 2023 Report | 18

30

35

40

GOVERNANCE IS GETTING ATTENTION
Asset managers are taking notice of corporate governance: what 昀椀rms do, how they do it, and withwhom. As one UK portfolio manager put it: “After 昀椀ve years, ESG investments (will) tend to lean
towards companies with sound corporate governance.” Just over two thirds (67%) of companies saythat governance criteria form a core part of all or part of most of their portfolios, the same proportion
as in 2022. Governance criteria are particularly important for US asset managers, 78% of whom say it
is a core part of all or part of most portfolios (up from 70% in 2022).
Governance is a broad term, so our 2023 survey sought to drill down further into the governanceissues that are shaping companies’ ESG investing strategies (Figure 11). Top issues are fair businesspractices and business ethics (41%), accounting transparency (39%), and diversity among boards
and leadership (35%). While there weren’t many major regional differences, French asset managers
identi昀椀ed voting and shareholder rights as their top issue (45% versus 30% for the total sample). A
comparison of these factors with those for E and S (discussed above) drives home the point that there
is not a singular driver of ESG investing, with much depending on the distinct objectives of portfolios
and investment approaches of asset managers.

Figure 11: Governance factors that are most important to companies’ ESG strategies,
2023

Fair business practices /Business ethics
Accounting transparency
Relations between board
and stakeholders
Diversity among board
and leadership
Voting / Shareholder rights
Ownership structure
Bribery and corruption
Executive pay
Conflicts of interest
0%

10%

20%

30%

Base: Implements governance criteria in portfolios (n270)

Index Industry Association 2023 Report | 19

40%

50%

While those asset managers incorporating governance factors were generally satis昀椀ed with existing
tools and metrics, they did see some room for improvement. 42% of “core ESG governance” asset
managers strongly agreed that they would have to invest more in their ESG capabilities in coming
years due to new ESG regulations (compared to 33% of all respondents). 38% would like to see agreater selection of ESG indexes (versus 26% of all); and 37% of assets managers who say governancecriteria are part of most portfolios would like to see better ESG risk metrics for individual issuers andmarkets (versus 30% of all).

“Asset managers are taking notice ofcorporate governance: what 昀椀rms do,
how they do it, and with whom.

“

Index Industry Association 2023 Report | 20

ESG DRIVERS ARE MULTIFACETED
The growing prioritization of ESG investing is being driven by a constellation of social, economic,
business and geopolitical factors (see Figure 12). Broadly, four overarching drivers can be discerned.
First, there is a strong ethical / societal imperative—28% of companies highlight concern about ESG
factors such as climate and corporate governance, while 26% point to the ethical obligation toward
responsible investing. This goes hand-in-hand with a continued business imperative, with over one
quarter (27%) seeing ESG as a means to diversify 昀椀nancial returns. As one UK portfolio manager put
it: “Due to the potential for long-term 昀椀nancial gains and the possibility to connect their portfolios with
their social and moral convictions, investors are becoming more and more attracted to ESG-related
investments.” Another UK portfolio manager underlined the potential for shared value creation: “ESG
investing will become a powerful tool for creating long-term value for investors, businesses, andsociety as a whole and (will be) positioned to capitalize the changes in the years ahead.”
The third overarching driver encompasses regulation and policy, with 24% citing the impact of theevolving political debate in the US, 21% pointing to reputation or regulatory risk, and 20% the impact
of international agreements. Finally, geopolitics remains a clear and present influence, with 26% citing
the energy crisis and 20% citing the role of geopolitical events such as the war in Ukraine.

Figure 12: Factors explaining why ESG has become more of a priority, 2023

Concern about ESG factors
Increased diversification of returns
High energy prices / energy crisis
Ethical obligation
Client demand
US political debate
Reputation or regulatory risk
Investment policy
Greenwashing / tougher approach
International agreements
Businesses adopting net-zero targets
Geopolitical events
Increased returns
0%

5%

10%

15%

Base: ESG has become more of a priority in company’s investment stategy over past 12 months (n244)

Index Industry Association 2023 Report | 21

20%

25%

30%

These underlying motivations and drivers of ESG shape attitudes and responses across many aspectsof ESG investing by asset managers. Based on the data above, asset managers were classi昀椀ed as
one or more of the following: ethical imperative, 昀椀nancial imperative, and regulatory imperative driven(Figure 13).2 “Ethical-imperative” managers are those who highlighted “concern about ESG factors”
or “ethical obligation” as driving forces for the growing prioritization of ESG; “昀椀nancial imperative”
managers are those who selected “desire for increased returns” or “desire for increased diversi昀椀cationof returns” as driving factors; and “regulatory-imperative” managers are those who selected one
or more of the following as drivers: “reputation or regulatory risk”, “concerns over greenwashing”,“international agreements”, and “political debate in the US”.
“Ethical imperative” managers, for example, are more likely to say that environmental criteria are a core
part of all of their portfolios (44% versus 36% for the total sample, see Figure 13); they are also more
likely to see governance criteria as a core part of portfolios (38% versus 30% for the total sample). Fairbusiness practices are an important factor for them in the governance arena (48%, compared withtotal sample proportion of 41%).
“Financial imperative” managers differ from others in their relative emphasis on factors such asaccounting transparency, use of indexes, and relative trust in different ESG data providers. In fact, inthe governance sphere, accounting transparency was their most important governance factor (46%).
“Regulatory imperative” managers are more likely to view environmental criteria as a core part of all
portfolios (41% versus 36% for the total sample); they are also more sensitive to issues of executive
pay on the governance side and the shifting policy landscape for ESG.

Figure 13: Proportion of companies where environmental criteria are a core part of all
portfolios, by type of driver / imperative, 2023

50%

40%

19%

30%

20%

10%

0%
Total

Financial

EthicalRegulatory

Base: Total (n297), Financial imperative managers (n100), Ethical imperative managers (n117), Regulatory imperative managers (n166)2

Note that asset managers may fall into two or more categories.

Index Industry Association 2023 Report | 22

ESG ASSET CLASS EXPANSION CONTINUES,DRIVEN BY SIGNIFICANT GROWTH IN
COMMODITIESThe IIA 2022 survey highlighted the growing role of 昀椀xed-income assets (bonds) in ESG investing, with
76% of companies implementing ESG criteria in these assets. In 2023 昀椀xed-income ESG investing edged
up further to 78% of companies, putting it on almost on a par with equities (80% of companies). However,the big story this year is around the dramatic rise in ESG investing in commodities, with the proportionof companies implementing ESG criteria for commodities rising from 37% in 2021, to 47% in 2022, andto 62% in 2023. And the commodities ESG momentum seems set to continue: 55% of asset managers
expect to see the use of ESG criteria increase a lot or by a moderate amount over the next 12 months.
This trend in ESG investing is especially pronounced in France, where 80% of companies use ESG
criteria in commodities. Passive index-based portfolios (72%) were also somewhat more likely to
implement ESG criteria in relation to commodities (compared to the proportion of the total sample,
62%). The prevalence of ESG in passive index-based portfolios is likely due in part to the surge inenergy and commodity prices over the last two years, leading to greater weight of ESG-screened
commodities in passive portfolios.

Figure 14: Asset classes in which companies implement ESG criteria, 2021-2023

80%
70%
60%
50%
40%
30%
20%
10%
0%
Equities

Fixed Income

2021

Commodities

2022

2023

Base: Implements ESG criteria in portfolios, 2021 (n300), 2022 (n300), 2023 (n297)

Index Industry Association 2023 Report | 23

Other assets

“Commodities” as a category represents a very broad array of assets, encompassing everythingfrom hydrocarbon fuels and renewable energies, to raw materials, foodstuffs, minerals and the rareearth metals that power electric vehicles and other green technologies. The nature of ESG issues anddrivers can therefore vary enormously—carbon impacts, supply-chain issues, labor standards, impacts
on local communities, to name but a few. Our 2023 survey provides a snapshot of the main factors
driving the growing role of ESG in commodities portfolios (Figure 15). While concern for ESG factors
is the top driver overall, it is notable that the second driver is reputational and regulatory risk, citedby 27% of commodities investors (in comparison to 21% of all investors). High energy prices and theenergy crisis also 昀椀gure prominently as a driver of ESG commodities investing.

Figure 15: Factors explaining why ESG has become more of a priority for commodities,
2023

Concern about ESG factors
Reputation or regulatory risk
High energy prices
Diversification of returns
US ESG political debate
Client demand
Ethical obligation
Businesses adopting net-zero targets
Greenwashing / tougher standards
International agreements
Geopolitical events
Desire for increased return
Investment policy
0%

5%

10%

15%

20%

25%

30%

35%

40%

Base: Implements ESG in commodities and indicated ESG has become more of a priority over past 12 months (n150)

Looking more closely at environmental determinants of ESG strategy among commodities (Figure 16),
we can see that “reputational and regulatory risks” emerges as the top factor, cited by 44%, followed
closely by sustainable supply chains (the environmental impact of suppliers and partners, 41%), andthen the resilience of physical assets to climate change (40%).

Index Industry Association 2023 Report | 24

Figure 16: Environmental factors that are most important to ESG strategies among those
who implement ESG in commodities, 2023
Reputational and regulatory risks
Sustainable supply chain
Resilience of physical assets
Natural resource usage or depletion
Biodiversity
Greenhouse gas emissions
Waste generation
Air pollution
Water pollution
0%

10%

20%

30%

40%

50

Base: Implements ESG in commodities and environmental criteria in portfolios (n167)

On the ‘social’ component of commodities ESG investing, the management of supply chains toensure that they are free from unethical practices emerged as the top issue, cited by 39% of 昀椀rms
implementing ESG in commodities (see Figure 17). Issues such as safety and quality, data protection,
diversity and inclusion, and equal employment opportunities also 昀椀gured prominently.

Figure 17: Social factors that are most important to ESG strategy among those who
implement ESG in commodities, 2023
Supply chain management
Safety and quality
Data protection and privacy
Diversity and inclusion
Equal employment opportunities
Training and upskilling
Local / Community investment
Health and safety
Labor standards
Human rights
0%

5%

10%

15%

20%

Base: Implements ESG in commodities and social criteria in portfolios (n167)

Index Industry Association 2023 Report | 25

25%

30%

35%

40%

TRUST: HIGH, BUT SOME SLIPPAGE
As in previous years, our 2023 survey asked asset managers whom they trust to push 昀椀nancial services ESG
innovation. The picture is generally one of high trust, with around three quarters trusting regulators (75%), theasset management industry (78%) and index providers (79%) a lot or somewhat to push ESG innovation andstandards. Nevertheless, there are some signs that trust levels have slipped back somewhat over the last year
(Figure 18). In 2023, 79% of investors trusted index providers a lot or somewhat to push innovation, a decline
on the 89% recorded in 2022. Trust levels for regulators, the asset management industry, and “other data
providers” have recorded bigger declines. For example, in 2023, 66% of respondents trust other data providers
to push ESG innovation and standards forward, compared with 80% in 2022.
The results indicate that trust is somewhat lower for “other data providers”, a category that could
include ratings agencies, reporting bodies, and various third-party data providers. As shown by Figure
6 above, for those respondents who see lack of transparency as a challenge to ESG implementation,
ratings agencies were most frequently mentioned as the source for ESG de昀椀nitions and scope, data
sources and their coverage, and weightings attached to models. Regulators have also seen erosion oftrust, falling from 91% in 2022 to 75% in 2023.
However, when asked who should be doing more to develop and improve ESG criteria and strategy
for the fund management industry, companies generally saw it as a broad-based responsibility
encompassing asset managers themselves, third-party data providers, index providers, regulators,
ratings agencies, companies, and policy makers (between 33%-38% said these organizations should
be doing more to develop and improve ESG criteria).

Figure 18: Proportion of respondents who trust the following players to push ESG
昀椀nancial services innovation, 2021-2023, % who trust a lot/somewhat
100%

80%

60%

40%

20%

0%
Index providers

Regulators

2021

Asset mgmt industry

2022

2023

Base: All respondents 2023 (n300), All respondents 2022 (n300), All respondents 2021 (n300)

Index Industry Association 2023 Report | 26

Other data providers

Against this broader background, asset managers continue to place high levels of trust in market
indexes. As in previous years, they particularly value indexes for their ability to respond quickly to new
ESG concerns and issues, and their focus on speci昀椀c areas of ESG performance (such as climate, etc.)(both 38%). As in previous years, indexes are widely used for measurement and benchmarking (41%),
investment strategies (29%), and both (25%). Perhaps surprisingly, they are as widely used by actively
managed funds as by passive index-based portfolios for measurement purposes (both 39%). But there
is room for improvement and there are some areas where asset managers would like to see morefrom index providers, notably more specialized indexes focused on speci昀椀c aspects or components
of ESG (38%), and greater transparency on selection criteria for ESG index constituents (36%) (Figure19). Asset managers who adopt social criteria as a core part of all portfolios were also somewhat
less likely (30%) than the total (38%) to agree that indexes respond quickly to new ESG concerns andissues.

Figure 19: Areas where asset managers would like to see more from index providers,2023

More specialized indexes
Greater transparency
on selection criteria
Greater transparency on thefrequency of data
Greater transparency on data sources
Greater transparency
on weighting of assets
Help improving our ESG capabilities
Greater standardisation of
metrics and methods
Better ESG risk metrics forindividual issuers/markets
Greater selection of ESG indexes
0%

5%

10%

15%

20%

Base: All respondents 2023 (n300)

Index Industry Association 2023 Report | 27

25%

30%

35%

40%

POLICIES HAVE CONSEQUENCES

Asset managers increasingly need to make ESG investment decisions against a shifting mosaic ofinternational, regional and national policy frameworks and signals. The last several years in particular haveseen a flurry of new initiatives and policy announcements. At the intergovernmental level, the UN 2022
Climate Change Agreement (COP27) recon昀椀rmed the Paris Agreement targets for achieving deep cuts inglobal greenhouse gas (GHG) emissions by 2030, introduced adjustment support for developing countries,
and proposed measures to mobilize international 昀椀nance in the 昀椀ght against climate change. On thebiodiversity front, the UN 2022 Global Biodiversity Agreement introduced measures to protect 30% of the
Earth’s land, ocean, coastal areas and inland waters by 2030.
Policy changes are also afoot at the regional and national level. Within the EU, the most pertinent legislation
for ESG 昀椀nancial services is the Sustainable Finance Disclosure Regulation (SFDR), in particular Article 8(so-called “light-green funds”) and Article 9 (so-called “dark-green funds”). Light-green funds are those which,while not explicitly focused on ESG, nevertheless promote environmental and social characteristics and follow
good practice by integrating a variety of environmental and societal factors (technically, “Principal Adverse
Indicators”, or PAIs) into their decision making. Dark-green funds are those that have sustainable investment
or carbon reduction as a core objective, and are subject to more stringent conditions around adverse
impacts as well as a requirement to do no signi昀椀cant harm. Both types of funds are subject to rules aroundinformation disclosure (e.g., pre-contracts, advertising), and the European Supervisory Authorities haverecently consulted on extending the list of adverse economic and social indicators to be used in assessing theimpact of these funds.
The US has also witnessed signi昀椀cant policy changes. The US Securities and Exchange Commission (SEC)
is proposing new rules for greater corporate ESG disclosures. The US Inflation Reduction Act contains
measures to promote increased investment in green technologies and infrastructure. More generally, there isa vigorous debate around the role of ESG taking place both nationally and at state level.
Policies have consequences, and our 2023 survey shows that investors are already pivoting rapidly inresponse to these international, regional and national policy shifts (Figure 20). 73% say that the UN 2022
Global Biodiversity Agreement will have a major or some impact on their ESG investing strategy. 88% of US昀椀rms highlight the impact of new SEC proposals for greater ESG disclosures, while two thirds (66%) of EU
昀椀rms say the EU SFDR has had animpact on their investment strategies. For both US and European 昀椀rms,
the ongoing US political debate around ESG is also exerting a signi昀椀cant impact on ESG investment strategy(68% say it’s had a major/somewhat of an impact). The impact of that debate is particularly pronounced for
US assets managers (78%). Three quarters (75%) of all companies expect that they will have to invest more in
their ESG capabilities in the coming years due to additional ESG regulations.

Index Industry Association 2023 Report | 28

Figure 20: Extent to which policies have had an impact on ESG investing strategy, 2023

SEC proposals
UN 2022 Global
Biodiversity Agreement
EU Taxonomy
UN 2022 COP27
Political debate around
ESG in the United States
EU SFDR
0%

20%

40%

Net: Major or somewhat of an impact

60%

80%

100%

Net: Minor impact or No impact at all

Base: SEC proposals (n80, US respondents),. SFDR and EU Taxonomy (n220 respondents, FR, DE, UK respondents), UN 2022 COP27, UN 2022 Global
Biodiversity Agreement, and Political debate around ESG in the US (n300, all respondents)

The evidence also indicates that European asset managers are still facing formidable challenges incomplying with SFDR. 46% report challenges due to a lack of available or easily accessible ESG data, 41%
are concerned about resource constraints (having the time, staff and technology to meet requirements),
and 37% worry that they have limited guidance on how to interpret and implement the requirements. As
one US asset manager put it: “Regulations are moving so quickly and one of our challenges is that reporting
requirements especially in Europe are becoming quite onerous and hard to keep up with.” Nevertheless,companies are pivoting fast in certain areas (Figure 21). For example, over half of EU companies havealready reclassi昀椀ed funds between Articles 8 (light-green funds) and Article 9 (dark-green funds) in
response to SFDR regulation. This trend is particularly pronounced amongst French asset managers.

Figure 21: Proportion of 昀椀rms reclassifying some funds between Article 8 and Article 9
funds, 2023
70%
60%
50%
40%
30%
20%
10%
0%
Total

Base: UK and EU
respondents (n220)

UK

From art. 8 to art. 9

FranceFrom art. 9 to art. 8

Germany

No reclassification

Index Industry Association 2023 Report | 29CONCLUSION

The 2021-2023 IIA surveys of asset managers provide a unique perspective into how asset managers
view the evolving ESG investment landscape and its potential future development. Three trends
stand out over this period. First, asset-manager support for ESG investing in the US and Europe hasremained rock solid, despite the political vicissitudes of ESG generally and signi昀椀cant economic andgeopolitical volatility in both regions. Second, asset managers increasingly see ESG as a spectrumof issues, moving far beyond the conventional focus on climate change, a trend that undoubtedly
foreshadows future changes in how business, regulators and other ESG actors measure and report on
ESG impacts. Third, the AI and emerging technology revolution seems set to transform ESG reporting,creating potentially new levels of granularity in ESG insight and scrutiny, but also greater opportunities
to integrate ESG factors into investment decisions.

Index Industry Association 2023 Report | 30

ABOUT THE IIA
The Index Industry Association (IIA) is the global tradeassociation for the index industry.
A not-for-pro昀椀t organization serving the global communityof independent index providers, IIA membership is open to
independent index businesses worldwide. For more information
about membership, please contact CEO Rick Redding.
28 Liberty Street, 58th Floor
New York, NY 10005

OUR PURPOSE
The purpose of the Index Industry Association (IIA) is torepresent the global index industry by working with market
participants, regulators, and other representative bodies topromote sound practices in the index industry that strengthenmarkets and serve the needs of investors.

media@indexindustry.org
r.redding@indexindustry.org

ABOUT THE AUTHOR
Mark Purdy is managing director of Purdy & Associates, an independent advisory and thought
leadership 昀椀rm focused on issues at the intersection of economics, technology and business.
He has over 25 years’ experience as an economist in business and government. His recent work
has focused on ESG and the economic and business impact of next-wave technologies such as
AI. He has published widely in tier-1 media and business publications such as Harvard Business
Review and Sloan Management Review. He speaks on economics and technology issues atconferences, client workshops and seminars around the world.
www.purdyassociates.com

METHODOLOGYThe IIA commissioned Opinium, an independent strategic insight agency, to survey 300 Chief
Investment Of昀椀cers, Chief Financial Of昀椀cers, and portfolio managers across four markets: theUnited States, United Kingdom, France, and Germany. There were 80 respondents from the US,
80 from the UK, 70 from France, and 70 from Germany. Fieldwork was conducted from April
18th to May 9th, 2023.
Opinium is an award-winning, independent strategic insight 昀椀rm built on the
belief that in a world of uncertainty and complexity, success depends on theability to stay on pulse of what people think, feel and do.
www.opinium.com

Index Industry Association 2023 Report | 31Index Industry Association 2023 Report | 32