ESG-themed funds on track to double assets by 2026

Republican state leaders leading the anti-ESG charge won’t do much to curb demand, survey finds

The sustainable investing market in the US is projected to more than double by 2026, even as some Republican state leaders have begun to wage a war on ESG.

Assets in investments in North America that consider ESG factors will likely hit $10.5trn by then, up from $4.5trn seen in 2021, according to a report from PwC. During that time, global assets in sustainable investments are projected to rise from $18.4trn to $33.9trn. By comparison, total money in sustainable funds globally was just $2.2trn in 2015.

Interest for sustainable investing in the US in particular is growing as pension managers and other big customers demand it, PwC found in its survey of 250 institutional investors and 250 asset managers. Eighty-one percent of US institutional investors said they plan to up their ESG-focused allocations during the next two years, just behind those in Europe, at about 84%.

“Spurred on by recent landmark legislation that commits $390bn to fight climate change, the overall direction of travel among US investors is clear, even if the complexion of administrations changes and some state governments continue to push back on ESG,” the report noted.

Other regions

By percentage growth, the Asia Pacific region is expected to be the sustainable investing leader in the next few years. But the existing base of assets is much smaller than in Europe and the US, with about $1trn currently. That is projected to reach $3.3trn by 2026, according to PwC.

ESG invested assets in Europe are on track to hit $19.6trn, compared with $12.8trn in 2021.

In the Middle East and Africa, ESG-themed investments will likely reach about $300bn by 2026, up from $100bn in 2021.

Where the money will go

Despite the projected growth, asset managers have been relatively slow to add products that will be able to handle increased demand, the report found.

Just over three quarters, 76%, of asset managers globally said their first priority is to tweak existing products so that they can be packed as ‘ESG-orientated’, PwC found. Such changes could be in line with the EU’s Sustainable Finance Disclosure Articles 8 and 9, although standards in the US are also almost certainly to become stricter amid new rules from the Securities and Exchange Commission.

“Given the proportion of investors who are increasing their allocations to ESG funds, retrofitting is the minimum that asset managers need to do to stay in the game,” the PwC report stated.

Going beyond that, 88% of institutional investors said asset managers should be focusing on building new products with ESG considerations. But at the same time, only 45% of asset managers said they are planning to launch such products, the survey found.

However, US fund providers have been launching more ESG-themed products than ever, particularly ETFs. Last year, there was a 70% increase in the number of sustainable fund launches compared to those in 2020, according to a report earlier this year from Morningstar.

But managers of some of the products on the market may have to reconsider using ‘ESG’ in fund names, given a forthcoming rule from the SEC that addresses truth in labeling, particularly for sustainable funds.

A greater range of fund classification, though, would be good for the fund business, as asset managers focus more on companies that are working to turn around their ESG profiles, PwC said.

“ESG-designated funds will no longer be restricted to a narrow taxonomy of fully sustainable and inclusive assets, but could also invest in a much wider array of businesses to help reshape production techniques and to develop clean and green models,” the report noted.

“Asset managers have a once-in-a-generation opportunity to drive innovation and win new mandates through the compelling appeal of their ESG story and ability to deliver on their promise.”

Benefits of adding products

Sixty percent of investors who have used sustainable funds said in PwC’s survey they saw at least modest performance benefits because of ESG considerations, and about a quarter said returns were comparable to non-ESG options. Meanwhile, about 14% said ESG considerations dragged down returns.

However, most institutional investors, 75%, said ESG considerations are part of their fiduciary duty. And 72% said they have ESG-related goals set for asset managers, according to the survey.

Sustainable investing will also be a potentially lucrative business for asset managers going forward. Although fund providers do not appear to charge ESG performance fees, institutional investors indicated some willingness to pay that, to the tune of a 3% to 5% premium. Sixty percent of asset managers said fee premiums in that range would be acceptable, PwC found. However, fund companies would need to dedicate more resources to measuring impact in order to justify those fees, which could reduce the financial benefits of the fee premiums, according to the report.

And three quarters of investors also said they don’t mind paying more for sustainable funds in general, with more than half saying they would pay an additional 20 to 40 basis points. Asset managers are on the same page, with 79% saying they would consider charging an average of 35bps more for their sustainable products.