Global assets under management linked with companies that are signatories to the PRI (Principles for Responsible Investment) have almost tripled to $62trn (€55.3trn) in April 2016 from $21trn in 2010, according to Moody’s Investors Service (MIS).

Demand for sustainable investing has been driven by investor expectations and regulations, and the use of these strategies will continue to grow, MIS said in its in-depth analysis of the sector.

For instance, in France – where companies offering employee savings plans must include a responsible investment option – these products now represent 30% of company-sponsored savings plans, up from 4% in 2006.

MIS added that, while large institutional investors such as pension funds, endowments and foundations are driving rising demand, high net worth and retail investors are nonetheless playing an increasing role.

Retail SRI funds in Europe have nearly doubled over the past five years, from €75bn to €136bn.

Marina Cremonese, a vice-president at Moody’s, said: “Integrating ESG criteria into investment decisions should limit risks within portfolios and contribute to lower volatility and better performance in the long run.

“The effectiveness of these strategies, however, will have to manifest themselves through the cycle, as well as across teams and strategies.” 

But generating long-term value for investors means asset managers could preserve higher active management fees by integrating ESG criteria into their product suites, MIS said, adding: “There is investor demand for more transparent strategies and products, as well as tailored products that meet specific client needs.”

Several asset managers – including BlackRock, Amundi and Standard Life Investments – have proved that being early movers provides an edge, according to the analysis.

And it observed that, as the shift away from active management and towards lower-cost, passive management continues, asset managers specialising in active strategies are trying to gain a competitive edge through the introduction of ESG criteria in mutual funds and investment solutions.

But, besides the commercial advantages of providing ESG products, there are likely to be increasing regulatory pressures, the analysis warned.

MIS’s research follows the approval of the EU’s ratification of the Paris Agreement last week (4 October), which now takes effect on 4 November.

“It is a significant achievement,” MIS said, “and it is very likely new regulations and disclosure requirements will emerge for companies as a result.”

It added that the Financial Stability Board task force on climate-related financial disclosures is also expected to develop voluntary, consistent, climate-related financial-risk disclosures to be used by companies in providing information to investors and other stakeholders.

Meanwhile, asset managers have to overcome several hurdles to make sustainable investing strategies work.

These include an insufficient supply of investible products – such as green bonds – uncertain performance expectations, evolving disclosure regimes, limited ESG data and education.

“Finding consistent, high-quality ESG data is a challenge, given a lack of universally accepted ESG definitions and standard reporting guidelines,” said MIS.

“Asset managers also have to integrate the information into their investment process, must ensure such strategies are generating competitive returns, and need to communicate the process and results to investors clearly.”