Exponential Expectations for ESG Outstripping Supply

Exponential expectations for ESG

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Although there is a lot of discussion about a sustainable investment backlash, demand for these investments is outstripping supply, according to a new report from PWC – Asset and wealth management revolution 2022: Exponential expectations for ESG.

The report said that for some investors, financial return will remain the sole priority. although there is a growing number of investors who expect asset and wealth management organizations to make environmental, social, and governance (ESG) issues integral to their investment strategies.

“This shift is already having a revolutionary impact on product design, fund allocation, and performance objectives,” said the report which canvassed 250 respondents, accounting for a combined asset under management of approximately $50 trillion.

The survey showed that the global value of ESG funds will surge to nearly $34 trillion by 2026 as investors look to profit from a transition to green energy.

Larger firms are expected to increase their ESG-related assets under management (AuM) to $33.9 trillion by 2026, up from $18.4 trillion in 2021,

Their share of total AuM during that time period is set to rise from 14.4% in 2021 to 21.5% in 2026, comprising more than one-fifth of all assets.

The report notes the current growth is derived largely from retrofitted funds. At the end of 2021, 27% of funds in Europe had been repurposed to integrate ESG factors although it notes that new funds will be set up, raising new capital.

Overall, there is an upward trajectory with ESG-related assets expected to grow at a much faster pace than the asset and wealth management market as a whole.

In the US, they are predicted to more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026, while in Europe, the increase is forecast to be 53% to $19.6 trillion.

However, as demand for ESG products rapidly increases, 30% of investors say it’s a struggle to find attractive and adequate ESG opportunities due to a lack of consistent and transparent standards

It also revealed that nearly nine in 10 institutional investors believe that asset managers should be more proactive in developing new ESG products.

Fewer than half of asset managers or 45%, though, were planning to launch new ESG funds.

“Given that ESG is growing rapidly—and is projected to continue to do so—we believe that the market will open up over the next three to five years and present frontrunners with significant opportunities and challenges, ” said the report.

It believes the catalyst will be the broadening of ESG classification as investors and regulators focus more closely on supporting businesses that are undergoing green transitions.

it also noted that ESG-designated funds will no longer be restricted to a narrow taxonomy of fully sustainable and inclusive assets but could also invest in a much wider array of businesses to help reshape production techniques and to develop clean and green models. In turn, more businesses will be moving along this ESG path.

“Given that ESG is growing rapidly – and is projected to continue to do so – we believe that the market will open up over the next three to five years and present frontrunners with significant opportunities and challenges.

As our survey underlines, long-term survival, and success depend on the ability of asset managers to prepare for the next big shakeup in the market by differentiating their strategy and delivering on their purpose.” the report said.

It described the current “sweet spot” as a “once-in-a-generation opportunity to drive innovation and win new mandates”. Nearly eight in 10 institutional investors (79%) plan to increase their allocations to ESG products  over the next two years.

One of the biggest concerns is greenwashing with  71% of institutional investors and more than eight in 10 asset managers agreeing mislabelling is prevalent in the asset and wealth management industry, but added this is “rarely intentional”.

“If slip ups do occur, it’s important to be able to quickly explain why and to correct and learn from mistakes. Delays or lack of transparency can only heighten the reputational damage and risk of regulatory sanction,” PwC warned.

In terms of new products, the report highlighted asset managers have an opportunity to take an “actively interventionist approach” of investing in companies that aren’t sustainable now and then helping them with the finance and expertise needed to incorporate positive ESG outcomes into their operations.

It is likely that these funds will cost more. Nearly eight in ten asset managers would consider charging higher fees for their ESG offerings  – an average of 35 bps higher.

Although 78% of investors are willing to dig deeper into the pocket, around 57% would accept 20 to 40 bps, equal to a 0.2 to 0.4% increase in fees.

However, as the report notes, “even if asset managers do seek to charge higher fees to cover some of their additional costs, the question is how sustainable such a premium would be in the long term. This uncertainty underlines the need to focus on product differentiation and value for money.”

The findings of this report on ESG investing are clear that there is a strong demand from investors,” says  Kifaya Belkaaloul, head of regulatory, NeoXam. “However, as the desire to allocate capital towards ESG funds rises, more advanced information on what underpins these ratings is being demanded by investors.”

She added, “Financial institutions have to be able to harness the data that sits underneath the ESG scores and present it in a simple, clear way to investors. The firms that do this effectively will be in a better position to take advantage of the spiking demand.”

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