The concept of investing in environmental, social and governance (ESG)-centric products is not new. Institutional investors have long modeled their investment strategies around socially responsible themes such as clean air and water, diversity, human rights and workplace fair practices. However, sustainable investing in its current form has recently experienced considerable market momentum, driving large inflows into ESG focused products, resulting in an average Compounded Annual Growth Rate (CAGR) of 27 percent in global assets under management (AUM) over the last six years.

There’s been a significant jump in AUM for ESG-centric products, particularly in the past two years of the COVID-19 pandemic.

Regions with significant jump in AUM for ESG-centric products

We’ve seen a significant inflow into ESG-centric products, particularly ETFs, during the past two years, and we expect that trend to continue and accelerate.

Murali Sreedhar, Managing Director, Advisory, KPMG LLP

Product strategy

Passive and active managers are taking different approaches in terms of providing ESG-friendly investment products. This can range from integrating ESG-focused vehicles into an existing product framework to screening techniques that select suitable ESG offerings to creating new ESG-themed investments.

Bloomberg Intelligence predicts that passive investing will overtake active investing in the U.S., and eventually will do the same in non-U.S. markets (although at a slower pace). We believe this growing demand for passive products will result in an increasing number of passive ESG-based product offerings in the marketplace, especially in the U.S. where mutual funds and exchange traded funds (ETFs) are attracting huge investment flows.

Approach: Product Strategy

There are many specific or hybrid approaches managers can take towards developing an ESG product strategy. Below are some key strategies being adopted to provide ESG-themed investment offerings:

1. Screening investments for ESG specific characteristics

2. Integrating ESG investments into their existing models

3. Investing based on defined sustainability themes

4. Impact investing

5. Influencing ESG friendly corporate behaviour

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Asset managers must prepare their people, processes, technology, and data to incorporate ESG-friendly investments into their produce offerings.

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