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Is ESG Reaching the Tipping Point?

A just-released survey by PwC’s Luxembourg branch highlights some dramatic trends. Seventy-seven percent of European institutional investors surveyed plan to stop using non-ESG investment strategies by 2022. In Europe, ESG fund assets are expected to comprise up to 57% of total European ESG mutual fund assets by 2025.

As ESG assets are set to boom across the pond, there are also indications in the U.S. that investors are becoming more socially aware. For example, ESG ETF assets have risen sharply in 2020, with iShares’ three largest broadly diversified funds alone gathering $13 billion in assets year-to-date through October 16. Both iShares ESG Aware MSCI USA ETF (ESGU) and Vanguard ESG US Stock ETF (ESGV) have outperformed the S&P 500 Index in the past year, reinforcing the hypothesis that ESG investors do not need to give up performance to be more responsible.

It appears that a growing number of institutional and retail investors may be choosing competitively priced products from index giants like iShares, Vanguard, and others to serve as the core of their portfolios. This shift replaces traditional S&P 500 and MSCI EAFE index-based strategies while providing exposure to sustainable and social impact investing. If broad ESG index offerings are able to sustain a performance advantage over broadly accepted non-ESG products for the next few years, it is not unreasonable to anticipate a significantly larger movement of assets to core ESG holdings. 

For institutional asset managers, this may represent a fundamental shift that must be considered in light of new product and distribution strategies. For wealth managers, this highlights the importance of having a defined approach for clients that are increasingly demanding ESG/sustainable investing solutions.