The boom in investment in environmental, social and corporate governance (ESG) factors continued in 2022 due to growing consumer demand, which is helping to accelerate their adoption among banks and money managers.
According to a report by consulting firm Insider Intelligence, the ESG investment boom will accelerate, but the market for sustainable funds could shrink. As investors, asset managers and banks recognize the value of ESG, the more they will prioritize it.
According to a PwC report, 81% of U.S.-based institutional investors said they plan to increase their allocations to ESG products in the next two years, while 83% of Europeans said the same.
U.S.-based institutional investors and money management firms with sustainability strategies listed climate change and carbon emissions as their top priority, with each group saying it applied to more than $3 trillion of the assets they control, according to industry association US SIF.
Moreover, about two-fifths (41%) of banking executives worldwide chose ESG issues among their organizations’ biggest opportunities, according to an Economist Impact study sponsored by analytics firm SAS.
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Tight Conditions
For asset managers, growing client demand for ESG products will keep sustainable investing a priority and drive growth through 2025.
And green investing is also likely to gradually mature over the next few years as a “generational shift” in wealth management takes place.
However, increased scrutiny of ESG factors will force some asset managers to re-evaluate fund labels, causing the overall market to shrink, while fear of being accused of greenwashing will force banks and financial intermediaries to exercise caution in marketing new funds, with the result that total ESG products could decline despite increased demand.
Assets under management in the US amounted to $8.4 trillion at the beginning of 2022, according to US SIF, less than half the $17.1 trillion recorded in 2020. The sharp drop is mainly due to tighter conditions around what is classified as ESG.
In Europe, something similar is happening: there has been an increase in downgrades of ESG funds after the new regulations came into force. According to Bloomberg News, it is estimated that more than $100 billion in assets have been downgraded to date, with BlackRock and Amundi among the funds reclassified.
Moreover, the competitive advantage ESG provides will shrink, as what these products generate for wealth management firms is declining as the trend becomes the norm: According to PwC, ESG assets will make up 21.5% of global wealth in less than five years.
To read the Insider Intelligence report, click here
By Antonio Vilela
