Asset managers in Europe are prioritizing further development of specialized products in the environmental, social, and governance (ESG) space, according to the latest issue of The Cerulli Edge―Global Edition.

Some 66% of the managers surveyed by Cerulli Associates believe that the COVID-19 pandemic is spurring retail investor demand for ESG integration. Eighty-eight percent of the survey respondents are expecting an increase in demand among institutional investors for funds with an environment tilt.

“Thematic investing focused on environmental issues is emerging as a potential driver of future demand in the retail channel and new specialized products are coming into the market at a fast pace,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli.

The assets of ESG mutual funds and exchange-traded funds (ETFs) have grown at an exponential rate during the past five years and Cerulli believes the trend will continue. Evidence that managing ESG risks can positively affect long-term performance is increasing and gaining wider acceptance among investors, a growing number of whom are making use of specialized ESG implementation approaches.

The asset managers Cerulli surveyed in Europe expect product manufacturers to launch new ESG developed market equity (94% of respondents) and fixed-income products (81% of respondents) over the next 12 to 24 months. In addition, 81% expect product manufacturers to launch new ESG multi-asset funds in the next two years. In the impact investing segment, more than half (56%) of the managers we surveyed plan to launch new developed and emerging market equity propositions in the next 12 to 24 months.

When it comes to ESG ETFs, 86% of the managers Cerulli surveyed in Europe expect funds that focus on carbon footprint reduction or fossil fuel exclusion to be the most popular ESG ETF products over the next two years. In the wealth management space, 76% of the private banks Cerulli surveyed in Europe expect to see an increase in demand for ESG funds over the next 12 to 24 months. In addition, 52% of independent wealth manager respondents expect demand for ESG funds to rise over the next two years. Furthermore, 43% of the independent financial advisors surveyed predict significant demand from their clients for such funds and 56% expect moderate demand.

“In the near future, greater standardization in the ESG sector is expected, which could spur the growth of ESG model portfolios among retail clients and foster adoption among investors with lower levels of investable assets,” says Zumbo.

Other Findings:

• In the U.S., an increasing number of institutional asset owners intend to boost their allocations to alternatives and private markets. This shift toward more esoteric and opaque asset classes benefits investment consultants, because many institutions are unfamiliar with private equity and debt, infrastructure, and real estate. Cerulli notes that although consultants will incur a cost building expertise and diversifying into alternative asset classes and private markets, those that can demonstrate deep knowledge will be best placed to win institutional business.

• Cerulli’s analysis of the European assets under management (AUM) of emerging market equity funds from 2015 to October of last year shows that, despite the flight from this asset class in early 2020, AUM declined only slightly from 2019—still higher than in any of the past six years. Some 11% of the European ETF issuers Cerulli surveyed expect the highest demand over the next 12 to 24 months to be for exposure to emerging markets in Asia.