Pan-European report shows extensive use of exclusion and integration strategies, greater focus on stewardship.
Almost half of all assets under management in Europe (€10.7 trillion AUM) are invested using some form of ESG considerations, according to a report recently released by the European Fund and Asset Management Association (EFAMA).
Sixteen European countries, including France, Germany and the UK, with a combined €12.5 trillion of investment fund assets and €11.4 trillion of mandate assets, were surveyed, in collaboration with EFAMA member associations and strategy consultants at INDEFI, at the end of 2019.
Firm-level ESG selection strategies, i.e. those applied on all or a large part of the portfolios managed by an asset management firm, accounted for €10.7 trillion (45%) of European AUM at the end of 2019 according to EFAMA, mainly via exclusion strategies or integration of ESG risks and opportunities in the investment process.
Last week, the US SIF Foundation reported US-domiciled AUM using sustainable investing strategies had increased by 42% over the two years to the start of 2020 to US$17.1 trillion, representing more than a third of total US AUM.
Exclusion strategies are used to manage approximately €8 trillion AUM, nearly a third of assets covered in the report, while integration strategies are deployed in the management of €8.8 trillion of European AUM (37%).
For many asset managers, ESG engagement and voting also play a key role in their ESG strategies. Over 43% of total European AUM, or €10.2 trillion, are subject to ESG-related engagement or voting policies.
The report noted an upward trend in active engagement in response to the development of stewardship codes in various jurisdictions, regulatory measures including the first and second Shareholders Rights Directives and upcoming initiatives on sustainable corporate governance.
“While equity managers are the primary users of such strategies, making use of their voting rights, also managers of other asset classes, e.g. fixed income, private assets, are increasingly voicing their ESG expectations,” the report said.
More integration than impact
Product-level ESG selection strategies include four different approaches: exclusion, ESG integration, sustainability-themed products and impact investing.
At the product level, ESG integration is the most common sustainable investment practice, accounting for approximately 16% of the total fund and mandate assets, or €3.8 trillion. Methodologies include both quantitative top-down screening techniques and fundamental analysis of issuers across all asset classes, whether passively or actively managed.
Impact investment products are the least common, accounting for just under 1% of total AUM covered in the survey.
In terms of future market growth, the report said reliable and comparable ESG data from investee companies would be “essential” to support investment decisions and enhance ESG product offerings, adding that increased transparency was necessary to hold market participants accountable and avoid greenwashing. It also advocated the creation of an EU label dedicated to green retail financial products to avoid proliferation of national labels with varying specifications.
