ESG-related assets under management (AUM) are expected to continue to surge over the next several years, significantly outpacing overall growth in asset and wealth management (AWM) investments, according to a new study by global professional services firm PwC, which forecasts ESG AUM reaching $34 trillion, or 21.5% of all assets by 2026.

According to the PwC report, “Asset management and wealth revolution 2022,” ESG is set to become a key AWM market growth driver, replacing asset prices and flows as these traditional growth engines are threatened by gathering economic headwinds.

Olwyn Alexander, PwC Global Asset & Wealth Management Leader, PwC Ireland, said:

“ESG has become perhaps the most powerful driver of growth in asset and wealth management. The surge in demand for ESG investments highlighted in our survey exceeds almost all previous expectations.  With the current economic headwinds, we have seen some correction in asset prices and there is a risk of significant contraction in capital markets that would result in a further decline. This underlines the importance for asset managers and institutional investors alike to understand how to capture the shift to ESG as a counter-balance to potential portfolio underperformance as well as legacy product obsolescence.”

For the report, PwC surveyed 250 institutional investors and asset managers worldwide with combined global assets of $60 trillion, or nearly half of global AUM.

While investors, particularly in the U.S., have experienced some political resistance to ESG investing as sacrificing financial interests for a social agenda, the survey found that investors broadly expect ESG-oriented investing to result in improved performance. Approximately 90% of asset managers said that integrating ESG into their investment strategies will improve overall returns, and 60% of institutional investors reported that they have already seen better relative performance from ESG investing.

Moreover, three quarters of institutional investors surveyed said that ESG is now part of their fiduciary duty, and 72% reported that they have set ESG-related goals for their asset managers.

Despite the high-profile pushback, ESG investing appears to have similar momentum in the U.S. and Europe, with 81% of U.S. institutional investors planning to increase allocations to ESG products over the next two years, compared to 84% in Europe. PwC forecasts ESG AUM to reach over $10 trillion in the U.S. by 2026, more than double 2021 levels.

As ESG allocations continue to grow rapidly, the report indicated that demand for ESG investment products is outstripping supply. While 88% of institutional investors surveyed want asset managers to be more proactive in developing new ESG products, only 45% of managers said that they are planning to launch new ESG funds. Asset managers appear focused instead on converting existing products to an ESG orientation, with 76% reporting plans to retrofit or adjust their products to become ESG-compliant.

The study also indicated that investors appear increasingly willing to pay for ESG performance, with 78% reporting that they would pay higher fees for ESG funds, and more than half willing to link compensation to ESG performance. While 79% of asset managers said that they would consider charging higher fees for ESG offerings, the PwC study had not yet observed any ESG performance fees being charged so far. Potential fee increases appear likely, given the increased regulatory and compliance costs for asset managers.

The key barriers to ESG investing, according to the survey, include complex and inconsistent regulation, along with the need for improved transparency on ESG products. More than 70% of investors said that they are in favor of strengthening ESG regulatory requirements for asset managers, and 86% of asset managers believe that mislabelling of products is prevalent in the AWM industry.

According to PwC, these trends indicate a “once-in-a-generation opportunity” for asset managers to develop innovative ESG products, and win new mandates.

John Garvey, PwC Global Financial Services Leader, PwC United States, said: 

“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 in fact delivered.”

Click here to access the PwC report.