How ESG, custom indexing and technology are reshaping the future for CIOs

How ESG, custom indexing and technology are reshaping the future for CIOs

21 October 2021
Daniel Leveau

New research from 100 leading pension funds reveals that disruptive technologies and individual ESG policies are expected to spur the demand for custom indexing.

  • 85% expect the focus on climate action to increase
  • 70% believe demand for custom indexing will increase strongly
  • 62% will increase resource allocation to new technologies

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The investment management industry is undergoing tremendous change. Indexing and ESG are reshaping investor portfolios, while digitisation is impacting the industry’s entire value chain.

SigTech commissioned a survey [1] of pension funds and other institutional investors from across the globe to gain insights into how they address these mega trends. Collectively, the investors surveyed manage around USD 935 billion.


Strong growth in custom indexing

The disruptive market forces of ESG, indexing and digitisation are driving an increased demand for customisation. Two thirds (67%) of those surveyed believe custom portfolio solutions such as custom indexing will become one of the biggest growth areas in asset management and is one of the industry’s most exciting developments.

Customised portfolio solutions are bespoke investment strategies that are developed to meet the specific needs of investors. One of the key reasons for growth in this market is that 75% of the institutional investors surveyed said they are becoming increasingly sophisticated in their individual ESG requirements. In addition, investors are finding it difficult to find off-the-shelf products offered by fund managers that are fully aligned with their needs.



The demand for custom portfolio solutions is expected to become one of the biggest growth areas in asset management and is one of the industry’s most exciting developments. How strongly do you agree or disagree with this view?



Significant increase in technology spend

The findings show that two thirds (66%) of institutional investors believe technological advancements in the investment management industry and the level of digitisation will increase over the next five years. This explains why 30% said they will dramatically increase the resources they allocate to new technologies over the next three years, with a further 32% expecting a slight increase.

The survey further revealed some concerns amongst the institutional investor community about the strength of their internal capabilities. Only 36% of professional investors surveyed described their organisation’s internal expertise and capabilities to conduct quantitative research as ‘strong’, with 40% saying they were ‘intermediate’ and 18% describing them as ‘basic’.


How do you see the level of technological advancements in the investment management industry and the level of digitisation changing over the next five years?


The environment tops the list of ESG factors

Despite ESG already being one of the mega trends of the last decade, 62% of pension funds and other institutional investors still expect to increase their focus on ESG over the next three years. Some 14% said they expect their focus here to increase ‘dramatically’.

When considering what impact ESG will have on their investment activities, 43% said that environmental factors are most important for them. Nearly one in three (31%) cited social factors, and 26% selected governance as their main focus area.


Investor activism and use of ESG rating agencies are set to rise

Nearly one in three pension funds and institutional investors say their use of ESG rating agencies will increase dramatically over the next three years, and a further 38% believe it will increase slightly. However, the findings reveal that 66% of professional investors interviewed said they struggle with ESG rating agencies because they can provide wildly divergent ESG scores at a company level.


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Citations:

[1] SigTech commissioned the market research company Pureprofile to survey 100 pension funds and other institutional investors in Europe, North America and Asia. Interviews were conducted online in September 2021.