To solve our shared social, environmental and economic challenges, asset managers need to join the race for a better tomorrow

• _{Assets under management in infrastructure funds are expected to double by 2025}
• _{Pension fund assets are expected to grow to almost US$65tn by 2025}
• _{ESG-aligned funds cumulatively have already outperformed their traditional counterparts}

Tuesday 9 February 2021 – Currently controlling more than US$110tn, the asset and wealth management industry has an unparalleled power in shaping the future. With global assets under management projected to grow by up to 5.6% per annum to US$147.4 trillion by 2025, it can shape a future which is better for investors, shareholders, the economy and the wider society. This is according to PwC’s new global report ‘Asset and Wealth Management Revolution: The Power to Shape the Future’.

Projections for growth

PwC predicts that, if vaccination is widespread and effective and fiscal stimulus measures foster a rapid economic recovery, assets managed by investment managers globally could increase 5.6% a year, from $110tn at the end of last year to $147.4tn by the end of 2025. But sustained high infection rates and delayed economic recovery would slow down the increase in global investment assets to $139tn by the middle of this decade. In its worst-case scenario, with further waves of infection, delayed vaccination, more lockdowns and a stuttering recovery, global investment assets would still reach $130.8tn by the end of 2025. The difference between AuM under the best- and worst case scenarios is more than US$16tn, demonstrating how much is at stake.

Lifting the economy out of recession

At US$41 trillion, non-bank lending now exceeds bank lending in advanced economies and continuing low interest rates, coupled with higher regulatory ratios will increase pressure on banks and their ability to lend. The demand for funding to support economic recovery will spur demand for private credit funds and other alternative investment strategies. Investments in publicly traded equities and bonds will continue to provide significant sources of capital and lending.

“Accelerating investments could boost much-needed economic growth. There are record levels of unallocated capital in private markets, providing a springboard for recovery. However, the national volume of savings is at an historic high these days. Every euro of savings has the potential to be reinjected in the economy. In fact, mobilising savings for investments is one of the European Union's long-term strategic objectives in order to make it easier for companies to be financed directly without the intervention of banks, especially in view of the savings surpluses. There is room to do so in the Belgian fund industry, provided, of course, that a number of effective structures are put in place that could remove the fiscal and regulatory hurdles and enable investment in the financing of long-term projects”, says Damien Walgrave.

Providing for the future

By delivering risk-adjusted returns, AWM firms can help people meet their savings goals and bridge pension gaps in the face of economic fragility, ultra-low interest rates and a squeeze on government health and welfare budgets. Within retirement saving, specifically, pension funds now manage more than $50tn in pension assets, and PwC forecasts that this will grow to almost $65tn by 2025. PwC also expects assets under management in infrastructure funds to double to just over $2tn by the end of 2025, given the need to refurbish roads, airports and hospitals and to finance renewable energy projects.

“In November, the IMF called for advanced economies to increase spending on infrastructure and green technologies. Unfortunately, huge increases in public debt resulting from government support for economies during the pandemic limit the options available. That’s why in several countries, e.g. Luxembourg, Ireland, France, there are already specific vehicles in place to facilitate investing directly in SMEs and infrastructure projects. In fact, government incentives could be used to channel these funds back to companies that support the real economy. That’s where asset and wealth management firms have the ability to make up for the growing shortfall in available infrastructure investment, especially from governments. These investments are now mainly driven by pension funds and insurers, but there is also room for direct financing. In Belgium, the way is being paved for this with plans on the table by the Financial Services and Markets Authority (FSMA), but for the time being this has not yet reached its ultimate goal”, said Damien Walgrave.

ESG on a level playing field

Increasingly, investors are putting the environmental and social profile of AWM firms on a level playing field with financial return. PwC’s analysis shows that ESG-aligned funds cumulatively outperformed their traditional counterparts by 9% from 2010 to 2019.  In European markets that are leading the way on embedding ESG, our analysis indicates that ESG assets will make up between 41% and 57% of total mutual fund assets by 2025. And more than 75% of European institutional investors surveyed this year by PwC said they plan to stop buying European non-ESG products within the next two years. However, only 14% of European asset managers intend to stop launching non-ESG funds in the near future.

“While financial return will always be important, increasingly investors are deciding that social return is just as important. ESG investing has grown steadily in recent years, with ESG ratings, indices and other financial products proliferating to meet demand. Yet we’re still missing generally agreed upon criteria and relevant, comparable and verifiable ESG data needed to properly conduct due diligence, manage risks, measure outcomes, and align investments with sustainable, long-term value. Europe has an important role to play in paving this path, and the foundations for this are already being laid with the EU taxonomy regulation, a new uniform ‘language’ that helps distinguish which investments contribute to those sustainability objectives”, concludes Damien Walgrave.