Asset managers globally are expected to increase their ESG-related assets under management (AuM) to US$33.9tn by 2026, from US$18.4tn in 2021. With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years. It represents a dramatic and continuing shift in the asset and wealth management (AWM) industry according to PwC’s Asset and Wealth Management Revolution 2022 report. The report also captures the views of 250 institutional investors and asset managers worldwide, representing nearly half of global AuM.
ESG-oriented AuM is set to grow at a much faster pace than the AWM market as a whole. Under PwC’s base-case growth scenario, ESG-oriented AUM in the US (the largest AWM market) would more than double from US$4.5tn in 2021 to US$10.5 tn in 2026; in Europe (already up 172% in 2021 alone) it would increase 53% to US$19.6tn. Investors in other regions outside the USA and Europe are also growing their allocations. Asia-Pacific (APAC) has the fastest percentage growth in ESG AuM, with this expected to more than triple, reaching $3.3tn in 2026. ESG products in Africa and the Middle East are gaining market share, as well as in Latin America, where ESG products account for $25bn in AuM.
ESG investing found to yield higher returns
Belying questions of whether financial and ESG performance might conflict, nine of ten asset managers surveyed believe that integrating ESG into their investment strategy will improve overall returns. What’s more, a majority of institutional investors, 60%, reported that ESG investing has already resulted in higher performance yields, compared to non-ESG equivalents.
With the prospect of higher returns, investors surveyed are willing to pay for ESG performance – three-quarters, 78%, say they would pay higher fees for ESG funds. Half of investors, 52%, are willing to build ESG into performance-related fees – two-thirds of those would accept a 3-5% ESG premium. More than half, 57%, of asset managers are looking at charging ESG-based performance fees, with most of these, 60%, saying a range of 3-5% would be acceptable.
For asset managers, higher fees are needed in some instances to make up for increasing ESG compliance costs – 35% of asset managers surveyed noted these costs have increased 10-20%.
While tensions are frequently highlighted between ESG priorities and asset managers’ fiduciary duty to maximize financial returns for investors, three-quarters of investors now consider ESG to be part of their fiduciary duties. Nearly as many, 72%, say they set ESG-related goals for their asset managers at a portfolio level, however the extent to which this overrides financial return varies.
Olwyn Alexander, PwC Global Asset & Wealth Management Leader, PwC Ireland, said: “ESG has become perhaps the most powerful driver of growth in asset and wealth management. The surge in demand for ESG investments highlighted in our survey exceeds almost all previous expectations. With the current economic headwinds, we have seen some correction in asset prices and there is a risk of significant contraction in capital markets that would result in a further decline. This underlines the importance for asset managers and institutional investors alike to understand how to capture the shift to ESG as a counter-balance to potential portfolio underperformance as well as legacy product obsolescence.”
Demand for ESG investment products is outstripping supply
As the demand for ESG investment products rapidly increases, 30% of investors say that they struggle to find attractive and adequate ESG investment opportunities. Nearly nine in ten, 88%, of institutional investors surveyed believe asset managers should be more proactive in developing new ESG products. However, less than half, 45%, of managers said they are planning to launch new ESG funds. Instead, a majority of asset managers surveyed, 76%, said their immediate priority is converting existing products so they can be labeled as ESG-oriented.
Complex and inconsistent regulation is a stumbling block to an increased ESG focus as is the need for more trusted, transparent data on ESG products. A lack of consistent, transparent standards has made mislabeling products as “ESG” a widespread issue. Nearly three quarters, 71%, of institutional investors surveyed and over eight in ten asset managers said that mislabeling is prevalent within the AWM industry.
For 71% of institutional investors, at least part of the solution would be strengthening ESG regulatory requirements for asset managers. A majority, 56% of institutional investors and 76% of asset managers, said they support strengthening ESG disclosure rules for listed companies.
More than a third of investors, 38%, believe a lack of data from asset managers is a challenge in investing in or considering ESG products, while 64% of asset managers believe data challenges are a main obstacle when adopting or considering ESG investments.
John Garvey, PwC Global Financial Services Leader, PwC United States, said: “Investor expectations on ESG are transforming how value is defined and delivered within the AWM industry. There is a short term trend of ESG opportunists, responding to changing stakeholder demands and looking for quick wins. The longer term winners will be those asset managers who recognize that capturing the full potential of ESG demands a clear vision of what your business stands for, a strategy for change and a durable governance, accountability and reporting framework to make sure that what is promised in terms of ESG is in fact delivered.”
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