The increased focus on environmental, social and corporate governance (ESG) issues is fundamentally altering the asset management industry, with regulatory imperative and investor demand driving the change, according to the findings of a PwC study.
The in-depth study across asset managers with £15.5trn of assets under management found that three-quarters are being significantly influenced by both investors and regulations - though the majority said they were not fully prepared for major regulatory changes. And, with governments investing in a green recovery from a pandemic that has starkly revealed the potential impacts of global systemic risk, the pressure is likely to remain.
While rule changes are front of mind given the weight and diversity of the agenda, asset managers said even without any regulatory intervention, their path had been set by investors’ desire for more ESG products. Almost two-thirds who responded (63%) said there was a significant opportunity to develop new product ranges in response to changing consumer preferences on ESG.
Of those asset managers surveyed, more than eight in ten (82%), said they had an ESG programme in place, with virtually all of these viewing this as a transformational exercise to drive fundamental change across their organisations.
However, many firms are still reacting to incoming regulatory initiatives and to new investor demand in a tactical, bottom-up sense, and have not yet formulated a comprehensive strategic response.
The scale of demand for ESG products is revealed as the UK prepares to host COP26 in Glasgow in November. One quarter of asset managers surveyed said the conference - which is expected to deliver the biggest shake-up to global environmental policy since the UN Paris Agreement was signed in 2016 – was a significant driver of their increasing focus on ESG in recent months.
However, while the Paris Agreement led to an acceleration in ESG products, COP26 is likely to lead to a tightening of UK regulation, such as the UK’s plan to make climate-related disclosure mandatory by 2025. This adds to regulations already in play, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR).
The research follows a previous report by PwC, which revealed that managed funds focused on ESG could account for more than half of mutual fund assets by 2025, with more than three-quarters of institutional investors in Europe expected to stop buying non-ESG products.
By 2025 such funds are expected to have seen compound annual growth of 28.8% since 2019, with regulation and investor demand both driving this change.
The wave of ESG regulation worldwide is one of the leading drivers of change, with global initiatives progressing in different ways regionally and nationally, including both in the European Union and the UK itself.
Cross-border differences in regulations are creating a challenge for firms however, with almost two-thirds (63%) saying there was a lack of international consistency in ESG regulation. The research suggests that respondents are not yet fully prepared for the incoming UK and EU regulations. Only 25% and 13% of respondents said that they are fully prepared for EU SFDR and EU Taxonomy Regulation respectively.
Elizabeth Stone, Asset & Wealth Management Leader, PwC UK, said:
“Our research shows that client pressure and the post-Covid realignment of the global economy have added to the regulatory imperative around ESG products.But if firms want to remain relevant and stay ahead of the competition, they should now think strategically rather than tactically, considering fundamental change across their organisations. Fundamental and comprehensive change will take time and sustained commitment, so asset managers need to think strategically rather than tactically.
“Asset managers have an active role to play in addressing societal and environmental challenges and in helping to ‘build back better’. But to fulfil this role, firms will need to be clear on their ambition across the full range of ESG factors. Ultimately, those who are prepared for transformational change will see better results.”