Institutions across the world are expected to increase their investments in environmental, social and governance (ESG) assets by a dramatic 84% within the next four years, according to the latest research.
PwC’s latest study of asset and wealth management, Asset and wealth management revolution 2022: Exponential expectations for ESG, predicts that institutions will increase their ESG-related assets under management (AUM) to US$33.9trn by 2026, up from the US$18.4trn recorded in 2021. With a projected compound annual growth rate of 12.9%, ESG assets are on track to constitute 21.5% of total global AUM in less than five years.
According to PwC’s projections, ESG-oriented AUM in the US will more than double from US$4.5trn in 2021 to US$10.5trn in 2026. In Europe, where ESG investments rose by 172% in 2021 alone, this will increase by 53% to US$19.6trn. Investments in Asia-Pacific are expected to more than triple, reaching US$3.3trn in 2026.
Nine out of 10 asset managers told PwC that integrating ESG into their investment strategy will improve overall returns, while 60% reported that this has already resulted in higher performance yields compared to non-ESG equivalents.
More than three quarters of investors – 78% – say that they would pay higher fees for ESG funds, while 52% are willing to build ESG into performance-related fees. PwC said that higher fees are needed in some instances to make up for rising ESG compliance costs, with 35% of asset managers noting that these have increased by 10%–20%.
“ESG has become perhaps the most powerful driver of growth in asset and wealth management,” said PwC global asset and wealth management leader Olwyn Alexander. “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.”
