Asset managers globally are expected to increase their environmental, social and governance (ESG)-related assets under management (AUM) to US$33.9 trillion by 2026, from US$18.4 trillion in 2021, according to a recent report.
ESG-oriented AUM is set to grow at a much faster pace than the asset and wealth management (AWM) market as a whole; and, at current rates, the continuing transition into ESG-compliant assets is on pace for the asset class to constitute 21.5% of total global AUM in less than 5 years, asserts the PwC’s Asset and Wealth Management Revolution 2022 report.
Under the report’s base-case growth scenario, ESG-oriented AUM in the US (the largest AWM market) would more than double from US$4.5 trillion in 2021 to US$10.5 trillion in 2026; in Europe (already up 172% in 2021 alone) it would increase 53% to US$19.6 trillion. ESG products in Africa and the Middle East are gaining market share, as well as in Latin America, where ESG products account for US$25 billion in AUM.
As a region, however, Asia-Pacific has the fastest percentage growth in ESG AUM, with this expected to more than triple, reaching US$3.3 trillion in 2026.
Questioned on whether financial and ESG performance might conflict, nine of 10 asset managers surveyed expect that integrating ESG into their investment strategy will improve overall returns. While a majority of institutional investors, 60%, reported that ESG investing has already resulted in higher performance yields, compared with non-ESG equivalents.
With the prospect of higher returns, investors surveyed are willing to pay for ESG performance with 78%, saying 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% to 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% to 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 note that these costs have increased 10% to 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.
Mislabelling is prevalent
As the mandate for ESG investment products rapidly increases, 30% of investors say that they struggle to find attractive and adequate ESG investment opportunities. Nearly nine in 10, 88%, of institutional investors surveyed believe asset managers should be more proactive in developing new ESG products.
However, less than half, 45%, of managers say they are planning to launch new ESG funds. Instead, a majority of asset managers surveyed, 76%, say their immediate priority is converting existing products so they can be labelled 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 mislabelling products as ESG a widespread issue. Nearly three-quarters, 71%, of institutional investors surveyed and over eight in 10 asset managers say that mislabelling is prevalent within the AWM industry.
“Investor expectations on ESG are transforming how value is defined and delivered within the AWM industry,” says John Garvey, global financial services leader, PwC United States. “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 delivered.”
The asset manager survey sample included 250 respondents, accounting for a total global AUM of approximately US$50 trillion, while the institutional investors survey consisted of 250 respondents, with combined global assets of US$60 trillion. Public pension funds and private pension funds together accounted for more than half of the institutional investor respondent base.