Thematic Investment Predicted To Grow Significantly In The Next Three Years – BNP

Thematic investing^[1], fuelled by investors’ desire to achieve a positive impact, is expected to grow over the next three years according to the second thematic investing research report published by BNP Paribas Asset Management (‘BNPP AM’) and BNP Paribas CIB (Corporate Institutional Banking) in partnership with Coalition Greenwich.

Previously conducted in 2020, the survey covers almost 200 institutional investors and intermediary distributors in Europe, Asia and North America.  The Thematics Barometer aims to provide the global investment community with robust, credible and regular information about the key trends evolving within thematic investment.

Key findings of the latest survey^[2] include:

• Continued demand for thematic strategies, with a noticeable 20% increase in European usage since 2020: 65% of European investors are already using thematic strategies compared to the 46% recorded in the previous survey.
• More than 80% of investors were “familiar or very familiar” with thematic investment, suggesting that thematic investing has become more mainstream.  Overall, 8% of investors were not familiar with thematic investing, rising to 18% in the US.  Non-users were held back by concerns over performance (49%) and high fees and costs (41%).
• Yet at the same time, usage of thematic strategies by Asian investors fell to 34% from 54% in 2020; appetite among North American investors is lower still, with 43% not intending to invest.
• Despite differences across the world, investors showed clear interest on the opportunity for thematic investing.  When asked about their plans for the next three years, 70% of all respondents said they planned to increase their focus on thematic investment.
• Thematic investment growth is being fuelled by investor need for positive impact (70%) as well as the expectation of enhancing investment returns (63%).
• Since 2020, the sustainability themes most appealing to investors have shifted from an overall focus on SDGs^[3] (32% in 2023 vs. 59% in 2020) to a more targeted focus on specific themes.
• Consistent with the 2020 study, climate change (56%) and clean energy solutions (49%) were the most appealing.
• Elsewhere, investors were also found to be keeping a close eye on disruptors, particularly in healthcare innovation (60%) and robotics artificial intelligence (‘AI’) (59%).  Although healthcare remains one of the most innovative sectors in the economy, AI is poised to become more ubiquitous and develop into a key driver of digital transformation.

Sustainability And Returns Are Driving Growth

Achieving a positive impact and contributing to sustainable outcomes is the main overall objective in using thematic investing, with enhancing investment returns the second most important objective.  84% of investors consider using thematic investing to have a positive impact on long-term investment performance; a third believe it has a positive impact on short-term performance, although this has declined since 2020.

• The most appealing sustainable themes continue to be renewable energy (56%) and climate change solutions (49%).  In addition, 22% of investors indicate an interest in net zero solutions and 23% in water themes.  Social considerations are also key: 20% of respondents are interested in health wellbeing and 17% in demographics aging populations.
• Within innovation disruption themes, healthcare innovation (60%), robotics AI (59%) and biotechnology (36%) are the most appealing.

Asset Allocation To Thematic Investing: Breadth Of Offering Is Important

Although equities remain the mainstay of thematic investments, investors are increasingly looking to other areas of their portfolios.  In particular, fixed income is catching up quickly, with 67% of respondents allocating to thematic fixed income strategies.  Notably, the largest allocation to thematic investments in North America is to private markets.

Additionally, investors are split over benchmarks: 55% expect thematic strategies to use a niche thematic or sector benchmark, with 45% expecting a broad market benchmark.  Investors have a predominantly global focus when allocating to thematic strategies, with more than 70% focusing on global equities.

Regulatory Drivers Are Key

There are clear regional differences in the regulatory drivers of thematic strategy selection, with SFDR^[4] classifications dominant in Europe, compared to a strong focus on fiduciary duty in North America.

• SFDR is unsurprisingly a key focus for investors in Europe, with 65% of respondents looking for Article 8 solutions and 60% for Article 9.  Although SFDR is a European regulation, it is being used as a proxy in Asia, where about two-thirds of respondents cited it as a selection criterion.  Alignment with MiFID II^[5] preferences is also a key aspect in both Europe (50%) and Asia (52%).
• In North America, fiduciary duty is the most important regulatory aspect for 87% of respondents, followed by fund labels (20%).

Pieter Oyens, Co-Head of Global Product Strategy at BNPP AM, comments:

“Thematic ESG investing is fast becoming mainstream to help investors tackle long term sustainability issues that have the potential to transform markets and create value across portfolios.  Investors are aligning across multiple objectives relating to performance and fiduciary duty, whilst navigating the ever-evolving regulatory landscape.”

Constance Chalchat, Head of CIB Company Engagement and Global Markets Chief Sustainability Officer, BNP Paribas, comments:

“Although there are divergences in the pace and current composition of ESG thematic investing across regions, the significant momentum we are seeing in Europe is here to stay, as the research highlights that investors are targeting both alpha generation and impact.  The most appealing current ESG themes focus on investing in the energy transition, including pursuing targeted investment strategies across renewables and climate change solutions, as well as emerging areas such as water.”

BNPP AM and BNP Paribas CIB jointly sponsored the Thematics Barometer.  It was conducted by Coalition Greenwich, who interviewed 188 institutional investors and intermediary distributors between February and April 2023.  The previous survey was conducted in 2020 in Europe and Asia, but excluded North America.

Footnotes

1. Thematic funds are those built around a specific theme aimed at capturing the growth of companies in a defined universe. There are now many themes linked to environmental and social challenges, such as protecting the oceans, climate, inclusive growth, biodiversity, technology and innovation or health.
2. Conducted between February and April 2023
3. United Nations Sustainable Development Goals
4. Sustainable Finance Disclosure Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019 on information to be provided on sustainable development in the financial services sector.
5. European Union Markets in Financial Instruments Directive 2014

Source valuewalk