Retail and institutional asset owners across the region want ESG factors to play a role in investment decision-making
December 2019, London—Cerulli Associates’ latest report, European Environmental, Social, and Governance Investing 2019: Setting Standards and Enhancing Integration, shows the extent to which responsible investment (RI) is growing in Europe. In recent years, managers have been launching new value propositions in the environmental, social and governance (ESG) domain to meet increasing demand from local investors. Cerulli’s research shows that by the end of August 2019, 1,840 ESG mutual funds and exchange-traded funds (ETFs) were registered for sale in Europe and that 233 new ESG funds were launched in the region during 2018.
Although the pace of growth of ESG assets varies across Europe, demand for RI products is increasing throughout the region. This is particularly true in the wealth management channel, where private banks are registering the highest level of demand for ESG mutual funds and ETFs from their clients. Overall, ESG integration funds account for the highest level of ESG assets in Europe. They stood at €303.0 billion (US$355.9 billion) at the end of August 2019, having registered net new flows of €10.4 billion in 2018 and €26.6 billion by the end of August 2019.
“In recent years, asset managers in Europe have been launching new value propositions in the ESG domain, aiming to capitalize on the expected increase in demand from investors,” says Fabrizio Zumbo, associate director in Cerulli’s European retail research team. “In addition, they are devoting an increasing amount of effort to differentiating their new value propositions from those of their peers. This is a sensible move and should help them to attract new flows to their ESG platforms.”
Private banking is the leading distribution channel for ESG products in Europe and Cerulli believes that asset managers should consider targeting private banks with specialized ESG offerings. “Private clients are increasingly buying the narratives behind products. Managers that can create compelling narratives will be well placed to succeed in this area,” says Zumbo. “In addition, managers should look to build innovative and digital-driven ESG portfolio analysis tools for private clients. These tools will include online dashboards with statistics on non-financial risks and ESG factor exposures, as well as companies’ and portfolios’ carbon footprints.”
Almost half (45%) of the private banks Cerulli surveyed for the report believe that sustainable investing will be a very
important part of their business in two years’ time. Cerulli’s research shows that 73% of private bank respondents expect client demand for sustainable funds to increase. Private banks are adopting various tactics to develop their ESG offerings and value propositions to meet their clients’ needs. Large international firms generally have well defined RI approaches, whereas smaller banks often lack the relevant expertise and instead look for third-party managers to provide solutions.
In the institutional sector, the RI approach that asset managers, pension funds, and insurers use the most is ESG integration, which involves organizations systematically incorporating ESG factors into their analysis and decisionmaking. Cerulli’s research shows that 50% of UK defined benefit (DB) pensions already use ESG integration; over the next 12 to 24 months, this number is expected to increase to 65%. In Germany, only 25% of the DB pensions Cerulli surveyed currently use ESG integration, but this figure is expected to double to 50% over the next 12 to 24 months.
“As ESG integration evolves, it will become crucial for managers to translate their analysis of material risks into a robust and repeatable RI framework based on quantifiable ESG metrics,” says Justina Deveikyte, associate director in Cerulli’s European institutional research team. “Managers and investors should seek to develop a repeatable process to integrate ESG considerations into their investment decision-making.”
NOTES TO EDITORS
The Cerulli Report—European Environmental, Social, and Governance Investing 2019: Setting Standards and Enhancing Integration is the first Cerulli report dedicated to the topic of environmental, social, and governance (ESG) investing in Europe. It defines what constitutes an ESG investing framework and analyzes the various ways that European asset managers, private banks, and asset owners are incorporating ESG into their investment decision-making from both a product and process standpoint.
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