There is growing investment demand for active managers to craft new environmental, social and governance funds.
According to Broadridge Financial Solutions‘ new report, growing number of investor want active managers to introduce ESG funds as an investment option. So far, a majority 68% of ESG assets in the U.S> are now in actively managed funds.
In the U.S., net flows to long-term responsible funds quadrupled in 2019 to $20 billion from $5 billion in 2018, and flows are expected to reach $300 billion by the fourth quarter of 2021.
The makeup of the ESG investment marketplace has evolved over the years and could direct the types of new ESG offerings in the future. Specifically, since 2015, best-in-class/positive screening, sustainability/thematic and integration/engagement funds have all increased their share within the market. Meanwhile, exclusions-based funds have dropped from 36% to 7% of the market, and impact investing funds have remained consistent at 10% share in 2015 and 8% share in 2020.
“From both a supply and demand perspective, we have witnessed a shift toward achieving positive environmental and social outcomes alongside competitive investment returns,” Jag Alexeyev, Director Distribution Insights at Broadridge Financial Solutions, said in a note. “Active managers are in the driver’s seat when it comes to ESG, but in order to maintain their edge in this segment, they need to highlight their agility to proactively manage risks, leverage active ownership, pursue dynamic high-conviction strategies and deliver sustainable outcomes.”
The ESG theme remains a popular investment category in Europe and is only beginning to pick up momentum in the U.S. Flows into ESG active equity funds for the trailing 12 months rose to 15% of average assets in Europe and International cross-border markets, compared to 10% in the U.S.
Younger investors are expected to adopt ESG investments at a faster pace as well. For example, 69% of financial advisors under the age of 35 use ESG and mutual funds today and the number is expected to surge to 83% in two years.