Sustainable funds in the ascendant

PwC study on ESG in asset management: The state of ESG disclosure in asset and wealth management – from fund issuer to end investor

32 %

of European fund assets are already classified in line with Article 8 or 9.
9 of 10

investors see implementing sustainability as a long-term systemic change.
Only 1/3

of customers believe that their financial institution does enough in terms of sustainability.
1 in 4

financial advisers plans to end the sale of conventional products not applying ESG criteria.

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Patrick Akiki
Partner, Financial Services Management Consulting Lead
PwC Switzerland
Tel.: +41 58 792 25 19
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One third of European fund assets are already classified as sustainable

The number of funds available to investors who attach importance to environmental and social aspects together with good governance (ESG) has increased significantly in the past few years. Meanwhile, almost one third (32%) of total European fund assets are classified as sustainable for the purposes of Article 8 or 9 of the EU Sustainable Finance Disclosure Regulation. The increasing availability of ‘green’ funds is driven not only by regulation, but also by investors’ desire for greater sustainability in financial products.

Since the EU Disclosure Regulation came into effect in March 2021, many asset managers have overhauled their funds or completely relaunched them so they can be classified as falling within Article 8 or 9. This proportion will continue to grow in the coming months, as the pressure from investors for sustainable financial products is also steadily increasing.

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Overview of the study

Increase in proportion of green financial products set to continue

Almost a quarter (22%) of all funds in the European funds market and almost a third (32%) of total European fund assets are classified in accordance with Article 8 or 9 of the Disclosure Regulation. Asset managers, however, apply widely varying approaches in classifying the funds.

Classification in accordance with Article 8 or 9 does not constitute any formal ESG label and the upcoming entry into force of the extended MiFID II requirements in respect of observing customers’ sustainability preferences in the course of distribution creates further complexity. In particular, reputational risks may arise if, for example, Article 8 products are not appropriate under MiFID II to meet customers’ sustainability preferences.

Financial advisers also believe that the trend towards green financial products will continue, with 56% expecting that in the next two years there will be a significant increase (of more than 50%) in products that comply with Article 8 or 9 of the Disclosure Regulation. Consequently, 27% of fund distributors surveyed wish to completely end the sale of conventional products that do not apply ESG criteria in the upcoming years.

The Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation, SFDR for short, came into force in March 2021. The aim of this Disclosure Regulation is to increase transparency as regards the effects and risks of sustainability in the financial industry. Part of the Regulation comprises the division of funds into categories, with non-sustainable financial products falling under Article 6. The promotion of offerings under Article 8 includes their ecological or social characteristics. Investment products classified under Article 9 must have an explicitly sustainable investment goal.

Sustainability: not a trend, but a long-term, systemic change

The pressure towards sustainable financial products is also customer-driven, with a clear majority (89%) of investors believing that measures towards implementing sustainability are not a short-term trend, but a long-term, systemic change. Nine out of ten investors surveyed think that the financial sector, too, can make a contribution towards sustainability – both in combating climate change and in the battle against poverty.

Financial service providers are seen as important drivers in terms of sustainability issues and therefore bear great responsibility in this respect. Thus, they must actively work to embed sustainability transparently in their offerings.

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Investors demanding greater commitment to sustainability

However, many clients have the impression that the sector’s commitment in this area lacks behind: only one third of survey participants consider that their financial institution does enough in terms of sustainability.

In addition, investors are demanding greater transparency and a sufficient range of choice to be able to invest in sustainable financial products at all. A clear majority of those surveyed say that they wish to invest at least half of their portfolio in sustainable products.

Data accessibility as the biggest hurdle

The demand for more transparency in this respect comes not only from investors, but also from financial advisers: an important condition for the distribution of sustainable products is that detailed information about them should be available. Over half (53%) of respondents are, however, not satisfied with the information supplied by financial product providers. For this reason, 80% of financial advisers say that the greatest difficulty facing them over the next two years will be the availability of data needed to fulfil the regulatory requirements on sustainability.

From July 2022, fund providers will be legally required to supply even more detailed information about sustainability-related opportunities and risks – as contained in Level 2 of the Disclosure Regulation, which is expected to come into effect in July 2022.

However, is not yet clear what level of detail or what degree of transparency the sector will agree on in order to furnish the huge amount of information currently demanded by investors and fund distributors alike.

Sustainability in asset management: three viewpoints

Investment company product offerings
The investor‘s viewpoint
Fund distribution challenges

Investment company product offerings

The range of ‘green’ investment products on offer has increased significantly in the last two years. The Disclosure Regulation has strengthened this trend – and so investment companies have not only launched numerous new funds but also adapted existing offerings.

Asset managers, however, classify funds in widely varying ways, with some interpreting the regulations more conservatively than others. In this respect, it is important to note that classification in accordance with Article 8 or 9 does not denote a formal ESG label. What this means for investors: they should ensure that they have a precise understanding of a fund’s individual ESG goals as well as its investment process.

The investor‘s viewpoint

Investors are increasingly demanding a tangible sustainability commitment from companies – this also applies, more than ever, to the financial sector. People are also convinced that financial institutions can exercise great influence in matters of sustainability, and expect them to actively work in favour of the environment, social aspects and good governance. The younger generations, in particular, are demanding a change of attitude in this respect.

Many clients, however, are currently not satisfied with their financial institution’s commitment to sustainability. The severest criticisms concern a lack of transparency regarding financial products and the existence of an information deficit.

Fund distribution challenges

Financial advisers, too, face numerous challenges in implementing ESG regulations. 80% of financial advisers say that the greatest difficulty facing them over the next two years will be the availability of data needed to fulfil regulatory requirements.

This information deficit represents a problem for fund distribution that is reliant on such data and intelligence to be able to market sustainable financial products successfully.

56% see their greatest challenge as the ability to guarantee their clients a transparent investment advice process and thereby comply with the complex regulatory requirements.

The transformation of asset and wealth management in the direction of greater sustainability started quite some time ago. However, the sector has a long road to travel before it is able to implement this sustainability credibly and transparently.