AUM to triple in ESG funds in Europe

Olivier Carré, financial services market leader at PwC Luxembourg.

It may seem that Covid-19 put environmental, social and governance on the investment map, but it has only accelerated a trend that had been gaining momentum. If the trajectory continues, ESG funds will show a more than threefold rise in assets by 2025, increasing their share of the European fund sector from 15% to 57%, according to a new report -The Growth Opportunity of a Century – by Luxembourg PwC.

The report which called ESG investing the most significant development in money management since the creation of the exchange-traded fund two decades ago, noted the trend is being driven by large investors.

Over three-quarters of the 300 polled, including pension funds and insurance companies, said they would stop buying conventional funds in favour of ESG products by 2022.

Olivier Carré, financial services market leader at PwC Luxembourg said,Public awareness of ESG related risks, major regulatory change and institutional investors preferences are rapidly pushing ESG investing to the top of the asset management agenda. The combination of these trends has brought the European asset and wealth management industry to the brink of an imminent paradigm shift.”

“We expect that the AWM (asset wealth management) industry of tomorrow will be different from today, with ESG considerations becoming a standard for investing at a level playing field with the traditional financial yield standards,” he added.

Instead of a plethora of new funds, the report notes that a significant proportion of the asset growth would emanate from asset managers repurposing existing funds. This could be by overhauling a fund to place ethical concerns at the core of its investment strategy or simply incorporating ESG criteria into investment making decisions alongside other financial factors.

The shift would have major implications for companies across Europe in terms of redirecting capital into sustainable activities as well as also forcing businesses to be transparent about everything from their environmental impact to how they treat employees.

One of the challenges for investors is to avoid greenwashing and substantiate the claims fund managers make about their ESG credentials. The report highlights the ESG data constraints that asset managers face can border mainly on inaccuracy and non-alignment which in turn impacts ESG benchmarking, impact evaluation, risk management and the identification of sustainable investment opportunities.

PwC notes that an immature data market, the management and intellectual assessment of ESG data will be one of the key success factors for asset and wealth managers leading the ESG competition over the coming three to five years.

It recommends firms overcome these hurdles by engaging more closely with underlying corporates in order to receive accurate and timely date sets and reporting. They should also manage various data sources in order to foster an internal data environment sufficiently granular and exhaustive to serve their needs by implementing solid, regulatory-backed ESG reporting strategies and leveraging on third-party data providers.

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