Demand for ESG investments outstrips supply, PwC finds

Demand for sustainable investments is outstripping supply, new research suggests, in contrast to reports of a growing backlash against investing according to environmental, social and governance (ESG) principles.

A new study by PwC found that nearly nine in 10 institutional investors believe that asset managers should be more proactive in developing new ESG products. However, fewer than half of asset managers (45 per cent) were planning to launch new ESG funds.

“It’s possible that asset managers don’t realise the extent of the demand,” said Olwyn Alexander, global asset and wealth management leader, PwC Ireland.

Enthusiasm for ESG, PwC found, is high in every region of the world. For example, 81 per cent of institutional investors in the US plan to increase their allocations to ESG products over the next two years — almost on par with Europe, which leads the rest of the world in ESG investment, where 84 per cent said they planned to do so.

The findings run counter to headline-grabbing news of anti-ESG developments in the US. Louisiana, for example, last week became the latest US state to say it will divest from investments due to concerns about an over-emphasis on ESG. Its announcement, which focused on strategies provided by BlackRock, followed anti-ESG moves by Florida and Texas earlier this year.

PwC expects ESG-orientated assets under management to grow much faster than the asset and wealth management market as a whole and for passive approaches to ESG in funds and mandates to lead that growth.

It forecasts the compound annual growth rate of assets under management held by ESG mutual funds and mandates between 2021 and 2026 will be 12.4 per cent but within that figure active strategies will see annual growth of 12.2 per cent while passive ones will expand by nearly 17 per cent a year.

However, faultlines threaten the ESG investment ecosystem, according to another study released last week.

Redington, an investment consultancy, found a decline in decisive action by asset managers on sustainability issues. Specifically, 43 per cent of managers were unable to provide an example of a sell decision driven by an ESG view over the past year, an increase on the 39 per cent who could not do so when surveyed in 2021. At the same time, 35 per cent could not provide evidence of an ESG-motivated buy decision, significantly higher than the 26 per cent who could not do so last year.

The inability of many of the 122 global asset managers it surveyed to demonstrate action in response to ESG concerns came even though 98 per cent said they had a company-wide ESG policy.

“While we would expect to see some variation between ambition and action, how can managers really drive the change that is needed when so many are unable to evidence specific allocation decisions that were influenced by ESG factors this past year?” said Nick Samuels, head of manager research at Redington.

The research by PwC suggests one factor that could be influencing attitudes to ESG among asset managers — 35 per cent of those surveyed said compliance costs had increased by 10-20 per cent since they started to include ESG.

Those costs are also being felt by asset owners according to Tom Kuh, head of ESG strategy at Morningstar Indexes, which published its own survey probing asset owners on sustainable investing, also last week.

“While I think asset owners had a positive view of regulation regarding ESG, one of the downsides was the cost of implementation,” Kuh said.

“Findings show ESG considerations to be a major driver of asset owner investment policy, but we are still far from full investment portfolio implementation,” he said.

Nonetheless, both Alexander and Kuh were also optimistic about future growth of the ESG industry.

Kuh pointed to the positive inflows for European sustainable funds in the first half of this year, even as conventional funds suffered outflows.

Alexander alluded to the higher returns reported for ESG — the PwC survey found six in 10 institutional investors were recording higher returns on their ESG investments compared with non-ESG investments and that more than half had noted that ESG integration had taken less than three years to deliver those higher returns.

However, Kuh said one of the most important developments had been to the way that asset managers think about their investments.

“ESG is really about bringing additional information and analysis to investment decision making,” said Kuh. “Many asset managers report that it improves their decision-making process — whether it brings any improvement in returns in the long term . . . that story is still being written.”

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