Institutional investors plan to stop investing in non-ESG funds

Investors could ditch asset managers that promote non-ESG funds as a “historic asset and sentiment shift” to the investment strategies continues, finds PwC Luxembourg.

Almost half of European institutional investors have stopped or plan to stop investing with asset managers that promote environmental, social and governance-based funds alongside non-ESG strategies, according to research by PwC Luxembourg, and many plan to stop investing in non-ESG funds altogether.

Data from the consultancy’s new ESG dashboard found that 46 per cent of European institutional investors it surveyed do not invest, or plan to stop investing, with managers promoting non-ESG products alongside their ESG strategies.

Furthermore, two thirds of investors plan to stop investing with non-ESG funds altogether, with most aiming to do so by the end of 2023.

PwC’s dashboard – which is designed to support European asset managers expanding their ESG operations – found the vast majority (88 per cent) of European institutional investors are now evaluating asset managers on ESG grounds.

The dashboard gathered data from 3,354 respondents across the UK, Switzerland, France, the Netherlands, Germany, the Nordics, Spain and Italy, including 720 institutional investors active in ESG and collectively accounting for €13.5tn in assets under management.

The study found that 70 per cent of investors said they believe it is important to link managers’ compensation with the ESG impacts generated by their investments.

Institutional investors are even willing to pay higher fees to access the risk mitigation and value creation potential within ESG funds, PwC found, with nearly two thirds of insurers agreeable to paying a premium on ESG products.

Strong appetite for ESG products among institutional investors is also driving changes in behaviour among asset managers. The dashboard’s data showed that 72 per cent of European asset managers were considering halting non-ESG product launches entirely, while more than 60 per cent were aiming to do so by the end of 2024.

Olivier Carré, financial services market leader at PwC Luxembourg, said its report had shown a “historic asset and sentiment shift” towards ESG, which was no longer just a “nice to have”.

He said: “Regulatory developments are a primary driver behind this growth and have led to the foundation for ESG standards to become increasingly extra-territorial.

“As regional regulations become increasingly stringent and as efforts towards the development of global ESG standards intensify, managers – especially those willing to compete at a global level – will be pushed towards an all-encompassing alignment of their products and operations with ESG.”

PwC’s findings followed a recent survey by asset manager Capital Group, which found that Europe had the highest percentage of ESG users globally. Its ESG Global Study 2022 surveyed 1,130 global institutional and wholesale investors and found ESG was central to their investment approach, compared with the global average of 26 per cent.

Research published last year by French financial services giant BNP Paribas found that 19 per cent of a sample of 356 asset managers and asset owners from around the world planned to incorporate ESG into all of their investments by 2023. In total, the survey found that 22 per cent integrated ESG into “at least 75 [per cent] of their portfolios” at the time the research was conducted, a figure that was “set to grow in the next two years”.

Reputational impact of ESG investing was the main driver, BNP Paribas found, selected by 59 per cent of respondents. This was followed by requirements placed on organisations by external stakeholders at 46 per cent. Higher longer-term returns was the third most popular motivation cited by respondents at 45 per cent.