50% of European mutual funds will be ESG by 2025 says PricewaterhouseCooper’s.
In its ‘2020 The Growth Opportunity of the Century’ report, the firms says there are four major factors behind the growth of ESG: regulatory changes, the Covid crisis, ESG outperformance and demand from institutional investors. The report said the majority of institutional investors expect a convergence between ESG and non-ESG products by 2022. 77% plan to stop purchasing non-ESG products in the same year.
‘You cannot have your cake and eat it, so the saying goes. For asset managers, this will ring true – you cannot be both ESG and non-ESG,’ the report said.
The report examines the following themes and uncovers some key findings
• A paradigm shift – The sheer transformational potential of ESG is highlighted by the fact that, even in a baseline scenario, PwC Luxembourg expects ESG fund assets under management (AuM) to account for over 41% of total European mutual fund assets by 2025; bolstered mainly by a surge in investor demand and European asset managers aligning with regulations. If an optimistic scenario was to materialise, PwC expects ESG assets to represent a staggering 57% of mutual fund assets by end-2025.
• ESG Fund growth – ESG Equity funds AUM will grow from EUR 866.3bn as of end-2019 to between EUR 2.6 trillion and EUR 3.6 trillion by 2025. Meanwhile, ESG bond funds AuM are expected to reach between EUR 1.1 and EUR 1.6 trillion by the end of 2025.
• European Leadership – Given Europe’s strong regulatory environment and momentum behind ESG, PwC believes that the region is strongly positioned to capitalise on this opportunity and further increase its position in the global ESG space. This, combined with a strong asset performance, would see Europe’s share of global ESG assets represent between 71% and 74% by 2025.
• A fundamental disconnect – A vast majority of European institutional investors expect a convergence between ESG and non-ESG products by 2022, with 77% of them planning to halt purchasing non-ESG products that same year. While asset managers agree that there will be a convergence, only 14% plan to stop offering non-ESG products by 2022.
• ESG Outperformance – The performance gap between ESG and non-ESG products will widen significantly in the future, and the long-held concern with ESG products’ tendency to underperform will reverse entirely. ESG products will emerge as a stronger source of returns and downside protection with respect to their mainstream equivalents.
• Key actions – The report identifies seven key actions that managers should consider from both a strategic and operational perspective in order to be able to take advantage of the century-defining ESG opportunity. These include repositioning your organisation, being credible and consistent in your ESG approach, integrating ESG at a product level, tackling the ESG data challenge, developing a strong ESG risk management framework, reporting to investors and educating the investment community and staff.