ESG-focused institutional investment set to rapidly expand: PwC

Investor interest in institutional asset classes that are environmental, social and governance (ESG) appropriate is set to increase rapidly, which will help ESG assets under management around the world expand 84% by 2026, according to a new report from PwC.

With ESG investing still a topic of growing focus within the insurance-linked securities (ILS) market and more broadly in reinsurance circles, this growth expectation for ESG appropriate asset classes has significant ramifications for these sectors.

Investors want to put their money to work in asset classes that are aligned with their ESG goals and motivations, meaning some asset classes, including insurance and reinsurance-linked securities (ILS), could have an opportunity to tap into investor appetite as the core mandate for the sector, of disaster risk capital provision, remains one that is positively viewed.

PwC’s report suggests that asset managers around the world will increase their ESG-related assets under management (AuM) to US $33.9tn by 2026, a significant 84% increase from US $18.4tn in 2021.

At the same time, this will mean that ESG assets are on pace to account for roughly 21.5% of total global investment AuM in less than 5 years, PwC explained.

That enormous growth will trigger a dramatic shift in investor motivations and PwC also notes that 8 out of 10 US investors are expected to increase their allocations to ESG appropriate asset classes over just the next two years.

ESG assets under management are expected to outpace the broader institutional investment market in both Europe and the United States by 2026. In the US they could reach US $10.5tn and inn Europe US $19.6tn, PwC believes.

According to 60% of institutional investors, ESG investing is reporting higher performance yields, compared to non-ESG equivalents, which is expected to be a significant factor in stimulating growth.

Another important data point for the ILS and reinsurance market, is that demand is currently outstripping supply and investors cannot find enough ESG assets to deploy capital into.

In fact, PwC highlights that 30% of investors are struggling to find attractive and adequate ESG investment opportunities to deploy to, driving home the opportunity for asset classes that have inherent ESG appropriate qualities, such as insurance-linked securities (ILS) and some other reinsurance-linked assets.

Scott Watson-Brown, PwC Bermuda Asset and Wealth Management Leader, explained, “Our survey highlights a surge in demand for ESG funds that exceeds almost all previous expectations. Over the next two years, eight in 10 institutional investors plan to increase their allocations to ESG products. What’s more, nearly nine in 10 have either already rejected or stopped investing with a specific asset manager (39%) or would consider doing so (50%) due to shortcomings in the manager’s ESG investment strategies.

“The investor focus on ESG is transforming how value is defined and delivered within the asset and wealth management industry. The longer term winners will be those asset managers who differentiate their strategy and deliver on their purpose. Capturing the full potential of ESG demands a clear vision of what the business stands for, a strategy for change and a durable governance, accountability and reporting framework to make sure that what is promised in terms of ESG is in fact delivered.”

PwC’s report also highlights that a huge nine out of 10 of the institutional investors surveyed believe asset managers need to be more proactive in developing new ESG products.

But, on the other side, lLess than half of asset managers said they are planning to launch new ESG funds to satisfy this demand.

The majority of asset managers surveyed are looking to convert their existing investment fund products so they can be labeled as ESG-oriented, which is a process many in the ILS fund community have already undertaken, or are planning to.

Olwyn Alexander, Global Asset and Wealth Management Leader, Partner, PwC Ireland, further explained that asset managers “need to reconfigure operating models to secure and retain mandates, and to create a compelling ESG story and develop credible reporting to track and communicate progress against it.”

There’s still a lot more work to do in ILS circles to be able to really capitalise on investor demand for ESG quality assets and funds, but the appetite is there in institutional investor circles, suggesting ESG will remain a core focus for many in the space.

ESG investing and the opportunities it presents are a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.