With a projected compound annual growth rate of 12.9 per cent, ESG assets are on pace to constitute 21.5 per cent of total global AuM in less than five years, the report adds. 

It represents a dramatic and continuing shift in the asset and wealth management industry. The report captures the views of 250 institutional investors and asset managers worldwide.
 
According to the report, ESG-oriented AuM is set to grow at a much faster pace than the AWM market as a whole. 

Under PwC’s base-case growth scenario, ESG-oriented AUM in the US, the largest AWM market, would more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026. In Europe, which was already up 172 per cent in 2021 alone, it would increase by 53 per cent to $19.6 trillion, the report shows.
 
Investors in other regions outside the USA and Europe are also growing their allocations. Asia-Pacific has the fastest percentage growth in ESG AuM, expected to more than triple, reaching $3.3 trillion in 2026, the report adds. 

ESG products in Africa and the Middle East are gaining market share too, as well as in Latin America, where ESG products account for $25 billion in AuM.
 
ESG investing yields higher returns
Nine out of 10 asset managers surveyed also believe that integrating ESG into their investment strategy will improve overall returns, the report reveals. What’s more, a majority of institutional investors reported that ESG investing has already resulted in higher performance yields, compared with non-ESG equivalents. 
 
With the prospect of higher returns, the investors surveyed said that they are willing to pay for ESG performance. Three-quarters of them said that they would pay higher fees for ESG funds. Half of them are willing to build ESG into performance-related fees, and two-thirds of those would accept a 3 to 5 per cent ESG premium, the report adds.  More than half of asset managers are also looking at charging ESG-based performance fees, with 60 per cent of these saying a range of between 3 and 5 per cent would be acceptable.
 
For asset managers, higher fees are needed in some instances to make up for increasing ESG compliance costs. Of the asset managers surveyed, 35 per cent noted that these costs have increased by between 10 and 20 per cent, the report adds.
 
While tensions are frequently highlighted between ESG priorities and asset managers’ fiduciary duty to maximize financial returns for investors, three-quarters of investors consider ESG to be part of their fiduciary duties, the report shows. Nearly as many, 72 per cent, said they set ESG-related goals for their asset managers at a portfolio level. However, the extent to which this overrides financial returns varies.
 
Welcoming the findings, Olwyn Alexander, PwC global asset and 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,” he added.

As the demand for ESG investment products rapidly increases, 30 per cent of investors said that they struggle to find attractive and adequate ESG investment opportunities. Nearly nine in 10 (88 per cent) of institutional investors surveyed believe that asset managers should be more proactive in developing new ESG products, the report reveals.  

However, 45 per cent of managers said that they are planning to launch new ESG funds. A majority of asset managers surveyed also said that their immediate priority is converting existing products so they can be labeled as ESG-oriented, the report adds.

Complex and inconsistent regulation is a stumbling block to an increased ESG focus, as is the need for more trusted, transparent data on ESG products, the report states. A lack of consistent, transparent standards has made mislabeling products as “ESG” a widespread issue. Nearly three-quarters of institutional investors surveyed and over eight in 10 asset managers said that mislabeling is prevalent within the AWM industry. 

For 71 per cent of institutional investors, at least part of the solution would be strengthening ESG regulatory requirements for asset managers, the report says.  A majority of institutional investors and 76 per cent of asset managers, said they support strengthening ESG disclosure rules for listed companies.

More than a third of investors also believe that a lack of data from asset managers is a challenge in investing in or considering ESG products, while 64 per cent of asset managers believe that data challenges are a main obstacle when adopting or considering ESG investments, the report adds.
 
Explaining the findings, John Garvey, PwC global financial services leader at PwC United States, said: “Investor expectations on ESG are transforming how value is defined and delivered within the AWM industry. There is a short-term trend of ESG opportunists, responding to changing stakeholder demands and looking for quick wins.” 

“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,” he added.

WealthBriefing will also be holding its Second Annual Wealth for Good Awards 2023, giving industry the opportunity to demonstrate their commitment to ESG, impact, diversity and inclusion. Find out more here.