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Euros in EU-domiciled ESG Mutual Fund AuM as of end-2022 (57% of total Mutual Fund AuM)
Number of Article 8 Mutual Funds as of end-2022
Number of Article 9 Mutual Funds as of end-2022
Euros in Forecasted EU-domiciled ESG Mutual Fund AuM by 2025 (60% of total AuM)
With its constantly evolving regulatory environment, the EU has become a leader in the global AWM industry’s ESG transformation. The Sustainable Finance Disclosure Regulation (SFDR) mandates that all financial market participants disclose information about their use of ESG factors in investment processes, making the EU the leading region for sustainable investing.
In a context of economic and geopolitical turmoil, the number of ESG funds increased to 10,154 in the second half of 2022, carried by strong growth in the number of Article 8 funds which more than made up for the slight reduction in Article 9 funds. Indeed, many Article 9 funds were reclassified to the broader, and less demanding, Article 8 category due to asset managers’ concerns over the former’s more stringent requirements. As the SFDR and other sustainability-related regulations continue to evolve, and as regulatory authorities refine their approach towards enforcing them, asset managers in the EU will have to continuously adapt to the changing regulatory landscape.
ESG AuM is already following our projected growth trajectory. EU-domiciled UCITS ESG assets stood at EUR 5.1tn as of H2 2022, of which 93.3% and 6.7% are classified as Article 8 and Article 9, respectively. This figure corresponds to 57% of total EU-domiciled UCITS AuM – a stark increase from 52% in the first half of 2022. However, most of this increase comes from existing funds that were newly reclassified as Article 8 or Article 9 funds. New funds represent only a small fraction of EU UCITS ESG assets (4.5%), although we expect this share to increase as newcomers gain steam. Our latest projections indicate that ESG UCITS assets based in the EU will exceed EUR 7.9tn by 2025, comprising around 60% of the total UCITS AuM domiciled in the EU.
Subsequent editions of the poster will keep track of – and modify the figures in accordance with – current and upcoming regulatory developments.
In this report, we quantify and assess Europe’s dominance in the global ESG sphere, identify any shortcomings and emphasise the urgent need for asset managers to embark on full-scale ESG integration both within their business strategies and their operations. We then propose a roadmap that we believe will set asset managers on the path to achieving total strategic and operational ESG integration. We hope that this report sparks the necessary conversations among industry stakeholders and provides the guidance that asset and wealth managers need to take advantage of this landmark change.
While the term was originally coined in 2005, ESG emerged as somewhat of a buzzword following the implementation of the UN Sustainable Development Goals (SDGs) in 2015. Although Impact Investing and ESG Investing were, back then, niche investment strategies, this marked the onset of a paradigm shift in the investment landscape - establishing the first voluntary link between sustainability and financial services.
In the new decade, ESG has gone from a trend to the biggest revolution in the European fund industry since UCITS and AIFMD. Virtually all stakeholders are attributing strategic focus to sustainability issues, and the Asset and Wealth Management industry’s role in addressing them. We are seeing a similar shift in sentiment among EU policymakers, with a recent surge in regulatory momentum embedding ESG as a central tenet of the investment landscape.
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In a European context, we’ve identified four key catalysts that are driving the sustained growth of ESG.
These catalysts are set to usher in the greatest shift the European AWM industry has ever undergone; presenting managers with the opportunity to drive change by playing a key role in mitigating climate risk. As the European Commission has noted, the scale of investment needed to transition to a sustainable and green economy is beyond the capacity of the public sector alone. Asset managers can change the world for the better by rechannelling capital towards sustainable businesses and innovations, contributing to the creation of a low-carbon, climate resilient and circular economy and strengthening efforts to eradicate social injustices across the globe.
We have identified seven key actions that managers should consider from both a strategic and operational perspective in order to stay ahead of the curve and make these changes.
As the ESG revolution fast approaches, managers must carefully consider what role they would like to play in it. A clear strategic decision needs to be made as to how deeply they would like to embed ESG considerations in their organisation. We have identified three strategic options that asset managers can pursue: they can restructure to become a ‘sustainable asset manager’, undergoing a strategic overhaul and integrating ESG at all levels of their organisational structure. Alternatively, they can pursue a selective strategy, maintaining both ESG and traditional products; or maintain business as usual – complying with regulation but overall sticking to the status quo.
Beyond the above mentioned necessary strategic changes, managers must also strive to be consistent in their chosen ESG approach in order to establish and maintain credibility. This calls for a demonstrable commitment to walking the talk by exemplifying the same level of sustainability and ESG consciousness in corporate strategy and philosophy that asset managers expect from their portfolio companies. They must also talk the walk by upping transparency and thoroughness in internal ESG reporting, as well as by embarking on firmwide circulation of ESG knowledge in order to harmonise their sustainability story.
Once managers have positioned themselves with regards to ESG, they must make a number of strategic product considerations. Firstly, they must decide which new ‘Sustainable Finance Disclosure Regulation’ category they would like to launch their products under (i.e. Art. 9, Art. 8 or non-sustainable). They must then decide how to implement ESG indicators in their investment and risk processes, how they will structure and rationalise their fee structures; and how they will elucidate and market their ESG efforts to the investor base.
The ESG data constraints that asset managers face border mainly on inaccuracy and non-alignment. This impacts ESG benchmarking, impact evaluation, risk management and the identification of sustainable investment opportunities. We identify two main options available to Asset and Wealth managers when it comes to overcoming this hurdle. Firstly, they can engage more closely with underlying corporates in order to receive accurate and timely date sets and reporting. Secondly, they can manage various data sources in order to foster an internal data environment sufficiently granular and exhaustive to serve their needs by implementing solid, regulatory-backed ESG reporting strategies and leveraging on third-party data providers. However, considering an immature data market, the management and intellectual assessment of ESG data will be one of the key success factors for Asset and Wealth managers leading the ESG competition over the coming three to five years.
As investors and policymakers alike attribute increasing importance to the assessment and mitigation of ESG risks, asset managers will need to vitally restructure their risk management frameworks in order to comply and thrive. Overlooking ESG-related risks could have serious reputational and financial repercussions for asset managers in the new landscape. Developing a more resilient structure for risk management involves adopting and implementing expert risk identification and management practices internally and within underlying corporates. Managers will also have to monitor and evaluate portfolios at a high level and frequently disclose whatever ESG exposures there may be. Furthermore, they will have to reinforce efforts to ensure ESG compliance of investee companies either through greater engagement or through proxy voting.
As regulatory requirements relating to reporting and disclosure mount, and investors attribute increasing attention to the ESG metrics of the asset managers with which they invest, it is imperative that AWMs restructure their reporting processes. Those that go above and beyond minimum reporting requirements stand to be the biggest winners in this new landscape.
In order to accelerate the consideration for ESG indicators and risks as well as to successfully respond to an increased expectation of investors for ESG matters, asset and wealth managers need define their ESG strategy and corporate indent. Based on this they need to educate both their portfolio companies and their investors on ESG and the interaction with capital flows and financial performance. It will be critical to build stronger ESG expertise among their employees by upskilling existing staff on ESG principles and strategically scout for and integrate more diverse and ESG-trained talent.
Asset & Wealth Management Leader, Audit Partner, PwC Luxembourg
Tel: +352 49 48 48 2109
Advisory Partner, Sustainable Finance & Sustainability Leader, PwC Luxembourg
Tel: +352 49 48 48 4173
Partner, Global AWM Market Research Centre Leader, PwC Luxembourg
Tel: +352 49 48 48 2191
Audit Partner, ESG Audit Leader, PwC Luxembourg
Tel: +352 49 48 48 5410