Environmental, social, and governance or ESG investing could be the next big theme that could reshape passive investments ahead.
According to PricewaterhouseCoopers, as much as 57% of mutual fund assets in Europe will be invested in funds that consider environmental, social and governance factors by 2025, or €7.6 trillion or $8.9 trillion, compared to 15.1% at the end of last year, Bloomberg reports. Furthermore, 77% of institutional investors surveyed by PwC indicated plans to stop buying non-ESG products within the next two years.
PwC projects ESG equity funds will experience a compound annual growth rate of 26.8%, with assets quadrupling to over €3.6 trillion by 2025. Bond funds will also expand at a rate of 30.4% with assets exceeding €1.6 trillion in five years.
Due to increased attention on racial and economic injustice along with climate change in recent years, financial firms have been forced to review their own contributions to making the world a better place. The increased attention to do societal good has translated to a surge in ESG funds from pension funds to private equity firms and hedge funds that have contributed to hiring sustainability teams, rolling out new products and touting their green credentials.
“ESG is nothing less than an all-encompassing shift in the investment landscape; placing financial and non-financial performance criteria on a level playing field,” PwC said in a recent report.
ESG funds in particular are quickly growing in Europe as regulators and policy makers have made green issues a top policy priority, even creating a rulebook to ensure financial firms follow sustainability standards and screen for so-called greenwashing.
Meanwhile, growing public awareness of ESG-related risks, which has accelerated in the post-Covid-19 world, and a new generation of investors whom prioritize non-financial impacts alongside financial factors have added to the growing popularity of ESG funds.
The recent outperformance of ESG-related funds have also added to the increased interest.
“These catalysts are set to usher in the greatest shift the European asset and wealth management industry has ever undergone; presenting managers with the opportunity to drive change by playing a key role in mitigating climate risk,” PWC added.