ESG leads surge in index provider profits in 2019, finds new study

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Index providers trended up in 2019, with revenues rising 8 per cent to a record USD3.7 billion, according to new research published by Burton-Taylor International Consulting, part of TP ICAP's Data & Analytics division.

The study, which analysed the leading index providers, found rises across all index segments, but noted that the biggest risers were ESG indices, which saw revenues soar by 31.3 per cent to USD161.5 million in 2019.

Sustainable investing now plays a key role in investment strategy, and index providers such as S&P have responded to this by creating ESG-only benchmarks, helping to speed along ESG revenue growth. 

The report also found that revenue growth was coming from higher overall index license fees, which rose by 9 per cent to a record USD1.9 billion, due to an increase in assets under management. More assets were allocated to ETFs and mutual funds, as well as passive investment vehicles.

"A convergence of rising asset valuations, trend towards passive investing strategies, and record derivatives trading volumes all supported industry revenues," says David Tabaka, an analyst at Burton-Taylor. 

However, with global markets looking ever-more volatile, he warns that 2019’s sunny results might not last: “In a market downturn, I would expect asset-based fees from ETFs and mutual funds to take a bit of a hits since index providers charge a basis point fee for index licensing tied to assets under management. Price depreciation would lead to less index licensing revenue.” 

Nevertheless, the growth seen in sustainable investing may help the index industry to keep shining in 2020, against the general pandemic-related market downturn.

“I expect the ESG Index segment to continue to grow and to be more sheltered in a general downturn,” he said, noting that most ESG indices are still outperforming their parent indices as of April.

He adds that subscription revenues should be resilient, along with index licensing revenue for futures and options, which could go up due to increased market volatility.

Elsewhere, the study also analysed leading index providers including MSCI, S&P Dow Jones Indices, FTSE Russell, Nasdaq, Qontigo, Bloomberg, Alerian, Intercontinental Exchange, Solactive, Morningstar, CRSP and SIX.

It found that MSCI accounted for the greatest market share, accounting for 24.74 per cent of total industry revenues and narrowly edging out S&P Dow Jones Indices, which accounted for a market share of 24.66 per cent. FTSE Russell rounded out the top three with a 20.5 per cent market share.

Frankfurt-based Solactive reported the fastest growth in 2019, with revenue jumping 21.9 per cent while Bloomberg index revenue has seen the highest growth since 2015 with a compound annual growth rate of 72 per cent.