Report suggests four ways asset managers can capitalize on incoming ESG opportunity
The rise in ESG assets, supported by increased retail demand, heightened sustainability disclosure, and market regulation, will help drive sustainable investing assets to more than quadruple their end-2020 levels, reaching approximately US$13 trillion globally by 2025.
That’s according to a new report from Casey Quirk, a business of Deloitte Consulting, which defines dedicated sustainable investing as a subset of ESG investing which includes promoting sustainability as a primary investment objective rather than adopting ESG factors as one of several investment inputs. Examples of primary ESG objectives include positive ESG tilt, SDG alignment, and impact investments.
“The opportunity is massive, yet we believe many asset managers are still unprepared for this broad and long-term shift in investor preferences, especially U.S.-domiciled firms,” said Benjamin Phillips, Casey Quirk principal and one of the paper’s authors.
According to the paper, dedicated sustainable investing assets at the end of 2020 amounted to US$2.8 trillion, equivalent to around 3.4% of assets managed overall. By 2025, that will likely more than quadruple to US$13 trillion globally – driven by US$3.2 trillion of organic growth, US$5.6 trillion of strategy conversions, and US$1.3 trillion of market appreciation representing roughly 12% of total AUM among asset managers.
Breaking the data down geographically, Casey Quirk’s analysts said Europe has been the leader in this movement; by 2025, the EMEA region (Europe, Middle East, and Africa) is expected to account for US$9.5 trillion in assets placed in dedicated sustainable investing strategies. The U.S. is forecast to have US$2.5 trillion, while the Asia Pacific region (APAC) will have US$1 trillion.
“The opportunity is there for active management to capture market share from indexed strategies and reap considerable economic rewards if firm leaders can commit and execute on plans to retool with credible sustainable investing processes," said Alyssa Buttermark, co-author of the paper, manager and lead ESG analyst at Casey Quirk.
The efforts of asset managers to bolster their approaches as they defend market share and seize opportunities from sustainable fund conversions and new money, they said, will result in four distinct archetypes of firms:
- ESG risk integrators, whose commitment to dedicated sustainable investing or strategies to date has been limited. Primarily based outside of Europe, such firms will tend to use off-the-shelf third-party ESG data as one of many inputs in building portfolios.
- Client-led ESG providers, firms whose positions on sustainability are flexible but tend to be shaped by client direction;
- Goals-oriented outcome providers, which are making substantial sustainability commitments to adopt sustainability throughout their businesses and investment processes; and
- Sustainability purists, which primarily consist of boutiques that have been in the lead on ESG for years.
According to Casey Quirk, goals-oriented managers are likely best-placed to gain market share as the assets and adherents to dedicated sustainable investment grows. In contrast, the ESG risk integrators and client-led ESG providers are expected to struggle to defend their businesses