Get ready for the ESG fund ‘paradigm shift’

A report predictsdemand for ESG funds will surge in the next five years, altering the investment landscape.

ESG (environmental, social and governance) assets could make up more than half of total fund assets in Europe by 2025, PwC predicts, as investors wake up to the idea of using their capital to tackle problems such as racial inequality and climate change.

ESG investing means choosing investments based on how well they score on environmental, social and corporate governance issues. New data from PwC Luxembourg’s report The Growth Opportunity of a Century reveals that European ESG assets are forecast to reach between €5.5 trillion (£5 trillion) and €7.6 trillion in the next five years, making up 41% to 57% of total fund assets in the region. This compares to just over 15% of assets ESG accounted for at the end of last year, and would represent a “staggering” compound annual growth rate of 28.8%.

This growth will be driven by a surge in demand, especially from young investors, as well as asset managers aligning themselves with EU regulations designed to foster ESG investing.

Assets under management in ESG equity funds could reach as much as €3.6 trillion by 2025, the report predicts, while ESG bond strategies could hit €1.6 trillion.

Meanwhile, the performance gap between ESG and non-ESG products could widen significantly, PwC suggests, as ESG strategies emerge as a stronger source of returns offering better downside protection.

• The most contentious shares held by ESG funds
• Want to invest ethically? ii’s ACE 30 list of ethical investments can help
• World’s rich set to invest 75% more into social funds

A ‘once-in-a-century opportunity’

“ESG is nothing less than an all-encompassing shift in the investment landscape,” the report states.

In turn, this is creating a paradigm shift in the investment world on a par with major changes such as the introduction of UCITS rules, which changed how funds were structured and run.

“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,” says Olivier Carré, financial services market leader at PwC Luxembourg. “The combination of these trends has brought the European asset and wealth management industry to the brink of an imminent paradigm shift.”

He adds that ESG considerations will become standard when making investment decisions as this “once-in-a-century opportunity” takes shape, and Europe will be at the forefront of this movement. Currently, Europe accounts for 71% of global ESG assets and this is predicted to climb to 74% over the next five years.

“As global capital becomes increasingly channelled towards sustainable projects, Europe is well positioned to act as the global ESG hub, creating new jobs and opportunities and enhancing the prosperity and future life quality of its population," adds Carré.

PwC’s research surveyed 200 asset managers, 300 institutional investors and more than 800 European retail investors, representing $14.3 trillion (£11 trillion) in assets under management.