Managers with the largest percentage of worldwide assets managed against ESG-specific indexes further increased those allocations during the year ended June 30.
According to Pensions & Investments' annual survey of managers of indexed assets, Northern Trust Asset Management once again had the highest concentration of assets managed against ESG-specific indexes, rising to 15.14% in 2020, a steady increase from 14.36% in 2019 and 13.7% in 2018.
NTAM had $586.8 billion in worldwide indexed assets under management as of June 30.
In looking at 2020, Brian O'Donnell, a Chicago-based senior vice president in NTAM's funds and managed accounts group and head of business strategy, enablement and administration, said social issues such as the pandemic, social activism and the impact of global warming have heightened interest in socially conscious and sustainable investing in the U.S.
"We've started to explore sustainability as an investment factor, just like quality, size or value. So not only is it ingrained in our DNA as a firm, in terms of our commitment to climate change and diversity, equity and inclusion, it is something that we consider a key, potential driver of investment performance." Mr. O'Donnell cited a recent Morningstar Inc. study that showed 70% of sustainable equity funds ranked in the top halves of their categories, 44% ranked in the best-performing quartile and ESG metrics among bond issuers showed a similar impact.
European institutional investors have been early drivers of ESG mandates, Mr. O'Donnell said, but interest and options are rising in the U.S.
"At this point, the institutional space, particularly in certain regions, like Northern Europe and especially Scandinavia, you just don't see any new mandates that don't include some level or overlay of sustainable investing standards," Mr. O'Donnell said.
"U.S. institutions are increasingly following suit." He credited boards and consultants for driving that change.
Asset managers are also on board, he said, offering a wider variety of products tied to sustainability, whether they are ETFs, mutual funds or other vehicles that have sustainability as their primary focus or have an ESG overlay.
A 2020 global benchmark survey by the Index Industry Association, a New York-based not-for-profit organization that serves independent index providers globally, recorded a more than 40% increase from 2019 in the number of indexes measuring ESG criteria.
Rick Redding, CEO of the IIA, said areas of interest within ESG indexes vary geographically and by user base, but regulation in the European Union has had an impact on the creation of new indexes.
"There's a lot of interest in climate-based indexes and some of that is being driven by regulatory issues in the EU. The EU has specific sustainable finance benchmarks and right now they have two that they're regulating. One is based on the Paris accord indices and the second is one they call a 'transitional index.' Both of those, driven by the regulatory side, are for climate benchmarks," Mr. Redding said.
Mr. Redding said the IIA survey specifically looks at the number of indexes the providers administer, and although the indexes themselves do not directly lead to more passively managed assets, noting the development of new indexes can help observers better understand the space.
"So the number of ESG indexes has increased but that doesn't mean, in 2020, the ESG assets are going up the same amount. But coming in the future, a lot of the index managers will create products based on them and that's when the assets will flow into the investment products," he said.
John Delaney, portfolio manager, delegated investments, at Willis Towers Watson PLC in Philadelphia, said he has seen interest in and questions about passive ESG investing but not, necessarily, significant commitments.
"Clients are interested in exploring what types of options are available in terms of having ESG in place for 'passive' mandates — once you influence any type of ESG screen, it becomes what we call semi-actively managed because you're excluding certain stocks to do whatever screens you put on from an ESG perspective — I've seen interest in that. Mostly questions, mostly discussions. I think there's been some adoption of that more in portfolios that are not necessarily corporate sponsored."
State Street Global Advisors, Boston, had the highest dollar amount of ESG-specific indexed assets, rising to 6% of the firm's $2.494 trillion in worldwide indexed assets incorporating environmental, social and governance factors in 2020, up from 5% one year earlier. Measured in dollars, SSGA has maintained the largest allocation to passive ESG strategies since P&I added the category in 2018.