Active managers “in the driver’s seat” with ESG investment products, finds report

driver's seat

Investor demand for new actively-managed environmental, social and governance (ESG) funds is growing, and a report from Broadridge Financial Solutions documents that interest is shifting towards funds that employ best-in-class positive screening, thematic, and outcome-oriented funds.

In the US, net flows to long-term responsible funds quadrupled in 2019 to USD20 billion, from USD5 billion in 2018, and continued to grow during the first half of 2020 to reach USD21 billion.

The majority, 68 per cent, of ESG assets in the US are held in actively-managed funds.

Asset managers using strategies such as positive screening, as well as thematic and engagement funds have been increasing their share within the market since 2015, says Broadridge.

In the same time period, exclusions-based funds have dropped from 36 per cent to 7 per cent of the market, and impact investing funds have remained consistent, at 10 per cent share in 2015 and 8 per cent share in 2020. 

"From both a supply and demand perspective, we have witnessed a shift toward achieving positive environmental and social outcomes alongside competitive investment returns," says Jag Alexeyev, director Distribution Insights at Broadridge Financial Solutions. 

"Active managers are in the driver's seat when it comes to ESG, but in order to maintain their edge in this segment, they need to highlight their agility to proactively manage risks, leverage active ownership, pursue dynamic high-conviction strategies and deliver sustainable outcomes."

Asset flows towards ESG active equity funds during the trailing 12 months remained robust, reaching 15 per cent of average assets in Europe and International cross-border markets, and 10 per cent in the US.

A separate survey from Broadridge of 401 US financial advisors across wire, regional, IBD and RIA channels, showed that 81 per cent of wirehouse advisors have assets in ESG products today, followed by the IBD (68 per cent) and RIA (60 per cent) channels.

The survey was fielded from July to August 2020, and almost a quarter of financial advisors  reported that they saw an increase in client interest in ESG as a result of the Covid-19 pandemic. 

Generational divides were also found, with 69 per cent of advisors under the age of 35 using ESG mutual funds and ETFs today – a number expected to jump to 83 per cent in two years. 

Meanwhile, just over half (56 per cent) of advisors over the age of 55 use ESG mutual funds and ETFs. Older advisors appear to recognise the appeal and demand for ESG products, as 74 per cent of that group expect to use ESG mutual funds or ETFs in two years.