Embracing ESG transformation: How asset managers are leveraging regulation to drive value creation

Environmental, Social and Governance (ESG) issues are now front of mind for the asset management industry. The trend has been driven by changing public attitudes, increased investor demand for ESG-focused funds, and a realisation of the commercial growth opportunities.

PwC’s research suggests institutional investors in Europe expect ESG and non-ESG products to converge and, from next year, 77% of these institutions expect to stop buying the latter. We believe that in Europe, ESG fund assets under management could account for more than 50% of mutual fund assets by 2025, representing compound annual growth of 28.8% between 2019 and 2025.

Against this backdrop, it is crucial to understand how asset managers in the UK are integrating ESG into their investment processes. In our report, Embracing ESG transformation, we explore this through both quantitative surveys of asset managers with £15.5trn of assets under management, and a series of follow-up qualitative interviews.

The wave of ESG regulation worldwide has prompted acute awareness among asset managers of the need to comply with a host of new regimes. Some 44% cite regulation as a 'very significant' driver of their focus on ESG, and of ensuring their approach to ESG goes well beyond greenwashing concerns.

More broadly, our research identifies several other key drivers for asset managers’ increasing focus on ESG. Firms recognise the huge growth in investor demand for ESG – 31% point to changing consumer preferences over the past 12 months – and many regard ESG issues as front and central as they work harder to define corporate purpose. The COVID-19 pandemic has also accelerated the ESG focus, highlighting fundamental societal shifts in the context of environmental, social and healthcare crises.

Many firms now regard ESG as part of a broader imperative to transform every aspect of their organisations rather than as an exercise in regulatory compliance and responding to specific drivers. This research suggests many asset managers now see huge opportunities in ESG if they are able to look beyond regulatory necessity and embrace transformation. Some 63% hope to develop new product ranges, for example. The imperative today is to act strategically, rather than tactically.

Although most asset managers have a clear ambition, our research highlights some worrying disconnects, particularly in relation to approaches to ESG investment - where some firms lack a coherent investment approach on ESG issues at an entity level. Firms are also having to overcome a range of hurdles as they progress their ESG journeys, such as data quality, skills shortages, and navigating the waterfront of regulatory initiatives.

In this report, we consider how to achieve a transformative approach to ESG in practice. Now is the moment for asset managers to define ESG transformation for their own organisations, and to begin plotting a roadmap towards achieving their vision.