There is a mismatch between asset managers and institutional investors when it comes to ESG, according to PwC Luxembourg’s annual report on the Luxembourg banking sector, which this year places extra emphasis on developments surrounding ESG. The report explains that three-quarters of institutional investors plan to stop investing in non-ESG products next year, but only 14 per cent of fund houses plan to stop marketing non-ESG products.
“The gap between long-term investment views and short-term liquidity needs must be addressed by players in the financial industry, including banks,” said the department headed by Roxane Haas (pictured).
Luxembourg’s banking sector, comprising 128 banks, is seen as an international “hub” for banks from Europe, America and Asia.
Prevailing unsuitability
PwC speaks of a “prevailing unsuitability of relevant financial products to meet the growing interest of institutional investors”. According to the consultant, ESG is a consideration in investments for 80 per cent of insurers in EMEA and even a primary consideration for 19 per cent. Meanwhile, the report says that ESG risks affect the decisions of 90 per cent of European pension funds.
“In fact, the belief that ESG risks can have a significant impact on financial returns is now well established within the European insurance and pension industry,” PwC concludes in the report. A conclusion that, according to the consultant, emphasises that banks must accelerate more in their adoption of ESG.
The gap between the plans of asset owners and asset managers in this area shows that the level of interest in ESG investing and the range of products on offer do not match reality: 77 percent of the 300 institutional investors surveyed want to stop investing in non-ESG responsible products by 2022. Meanwhile, only 14 percent of the 200 asset managers surveyed plan to stop offering new products that do not have an ESG label in the same year.
Millennials and high-net-worth individuals
The need is not only there for institutional investors. Millennials would also like to invest (more) ESG, according to the report. However, almost three quarters of millennials are deterred from actually taking the step due to a lack of suitable financial products.
High-net-worth individuals, who form an important group in Europe with investable assets of more than 17,000 billion euros, are also increasingly keen on ESG investing than a few years ago, although they are more cautious than millennials. According to PwC, if asked they would like to allocate around half of their portfolio to ESG-responsible companies, provided they are given the currently missing information on expected financial returns, the range of ESG products on offer and their subsequent impact on ESG-related issues.
Although a significant figure, as far as PwC is concerned the outcome marks the differences between clients when it comes to understanding and accepting ESG. “At present, some HNWIs are not yet fully convinced that ESG investments have financial benefits. Others are unaware or simply not interested.”
More information
Sustainable products can become more mainstream if private banking clients are properly informed and advised on how to reap benefits from the products available, PwC argues in the report, pointing to a private banking study in Germany which found that more than half of private banking clients were unfamiliar with the term “sustainable financial products”. In fact, 65 per cent of private banking clients had no idea which sustainable products their own bank had made available.
PwC summarised their view with this advice: “Banks need to be more proactive in approaching existing and new clients about their sustainable financial products, using different sales approaches.”
