21 October 2020

IPE: ESG is huge opportunity for European managers – report

The upsurge of interest in environmental, social and governance (ESG) investing could prove a major business opportunity for European asset and wealth managers, according to a report from PwC Luxembourg.

Entitled “The growth opportunity of the century”, the report described ESG as representing a “paradigm shift”, the largest fundamental change in the investment landscape since the introduction of exchange traded funds.

The consultancy forecast that European ESG assets will reach between €5.5trn and €7.6trn by 2025, making up between 41% and 57% of total mutual fund assets in Europe, an increase of 15.1% at end-2019.

PwC Luxembourg ascribed this partly to Europe’s strong regulatory environment (encapsulated in the European Commission’s sustainable finance action plan) and said this could help the continent further increase its position in the global ESG space.

Combined with a strong asset performance, this would see Europe’s share of global ESG assets amount to between 71% and 74% by 2025.

Olivier Carré, financial services market leader at PwC Luxembourg said: “As global capital becomes increasingly channelled towards sustainable projects, Europe is well positioned to act as the global ESG hub, creating new jobs and opportunities.”

The study covered 200 asset managers, 300 institutional investors with European operations, and over 800 European retail investors, representing an estimated $14.3trn in assets under management (AUM).

The consultancy noted that investors allocated a record-breaking volume of assets to ESG funds during the pandemic; ESG fund flows accounted for almost a third of all European fund flows in Q2 2020, according to Morningstar.

‘Fundamental disconnect’

According to PwC Luxembourg, the vast majority of European institutional investors expect a convergence between ESG and non-ESG products by 2022, with 77% of them planning to stop purchasing non-ESG products in the same year.

But while asset managers agreed there would be a convergence, only 14% planned to stop launching non-ESG products by that date.

“You cannot have your cake and eat it. For asset managers, you cannot be both ESG and non-ESG”

PwC Luxembourg

“Therein lies the fundamental disconnect,” said the report. “You cannot have your cake and eat it. For asset managers, you cannot be both ESG and non-ESG.”

And it warned: “While ESG is commonly considered a rapid and significant development, many managers see it as just another product, similar to smart-beta or factor investing. Our data and market views will prove these sentiments wrong.”

The report identified seven key actions that managers should consider from both strategic and operational perspectives in order to take advantage of the ESG opportunity.

These include repositioning their organisation, for which PwC set out three options: retaining the status quo; maintaining both ESG and non-ESG investment approaches; and becoming a “sustainable asset manager” by integrating ESG at all levels of their organisational structure.

The report said the latter route would allow asset managers to emerge as potential leaders within the new ESG competitive landscape.

Asset managers would also need to restructure their risk management frameworks to mitigate ESG-related risks, said the report. This would include adopting and implementing expert risk identification and management practices, both internally and within underlying corporates.

Further suggested actions for managers included being credible and consistent in their ESG approach; integrating ESG at product level; and restructuring their reporting to investors, with those going beyond minimum requirements likely to be the “biggest winners”, the report said.

The full report can be found here.

IPE

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