how much do European asset managers stand to gain?

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SUSTAINABLE INVESTING

A ‘$7.3tn opportunity’ for asset managers

I wrote recently about an intriguing growth opportunity for European asset managers. As their larger US peers go quiet on green issues under the second Trump administration, the Europeans have a chance to win business managing money for pension funds who are increasingly worried about climate risk.

But how big is that opportunity?

Analysts at JPMorgan have had a go at quantifying it. In a note to clients yesterday, they looked at the world’s 100 largest asset owners (a category of investors that includes pension funds as well as sovereign wealth funds and foundations).

Sixty of these — controlling $17.9tn — say publicly that they integrate sustainability factors into their investment decisions. On average, these asset owners contract external managers for 39 per cent of their portfolios, JPMorgan’s team reckons. They suggest that indicates a $7.3tn “long-term opportunity linked to sustainable investing capabilities for asset managers”.

This number will make European asset managers’ ears prick up, as they look for ways to chip away at the dominance of US rivals, who currently account for nearly two-thirds of the investment work outsourced by big asset owners.

Research by non-profit ShareAction gives European asset managers dramatically higher scores on sustainability credentials than their US peers, particularly when it comes to their use of shareholder votes. This “positions them advantageously to seize opportunities in terms of securing mandates from asset owners who prioritise responsible investment”, JPMorgan wrote.

European managers such as Robeco, Axa Investment Managers and BNP Asset Management all score near the top of ShareAction’s ranking. The relentless shift from active to passive sustainable funds means a particular opportunity for France’s Amundi and Germany’s DWS, which are strong in the latter category.

Big US asset managers such as BlackRock and State Street — not to mention JPMorgan’s own asset management arm — could stand to lose out, having quit green financial alliances and reduced their support rate for climate-related shareholder resolutions.

There are some obvious grounds for caution here. For one thing, each of these 60 asset owners will “integrate sustainability factors” in a different way — some much more seriously than others. Even those most concerned about climate and social risks will be balancing them against other factors — notably cost and historical performance — where the US giants often have an edge. And despite their departure from the green alliances, the big US firms insist that they still take climate risks seriously, and can fully meet the needs of clients focused on those issues.

Yet there’s been a string of warning signs for those US managers in the past few months. The UK’s People’s Pension Fund pulled a £28bn ($36bn) mandate from State Street in February, after a review of its sustainable investment policy. Denmark’s AkademikerPension ended a 20-year, $470mn mandate with State Street for similar reasons.

Other big asset owners in the UK and the Netherlands have been threatening to make similar moves — as has Brad Lander, who oversees New York City’s giant public pension funds. Norway’s $1.8tn sovereign wealth fund, meanwhile, has warned that the market may be dramatically underestimating the threat that climate change poses to equity valuations.

While the bulk of these headlines so far have been driven by large European pension funds, the growth opportunity they offer is relatively modest. The European asset owners in this data set outsource only 20 per cent of their investment to outside managers (a figure that is skewed by the huge Norwegian wealth fund, which outsources only 5 per cent), compared with a global average of 39 per cent.

So of that $7.3tn “long-term opportunity” for asset managers painted by JPMorgan, only about $500bn is in Europe. Sustainability-conscious asset owners in North America account for about three times as much. Ditto, the Middle East. In Asia, the figure is $3.4tn. If pension and sovereign wealth funds in those regions start pulling mandates over climate concerns, then the US managers will really have something to worry about.

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