China and sustainable investing are two of the most important growth drivers for the asset management industry. So far, fund managers have pursued these two efforts in splendid isolation, without worrying about how activism at home might affect business in China. We expect this partition of affairs won’t be sustainable for much longer.

China represents the single most attractive new growth region for asset managers. It is already the second-largest market (after the U.S.) for asset management services: By year-end 2021, total fee revenue from Chinese domestic channels will exceed former second-place U.K. by over 20%. There remains considerable room for growth, as the share of Chinese domestic assets in fund products remains low relative to mature markets, and there has been consistent policy support for channeling Chinese savings into domestic capital markets. In addition, international managers’ home-market clients have piled into Chinese assets, with foreign holdings of Chinese stocks and bonds exceeding $1 trillion by the end of 2020, a sevenfold increase since 2016.

A world away from the bustle of Shanghai, another major growth initiative for asset managers has been to reorient themselves around sustainable investing, specifically environmental, social, and governance parameters, as opposed to being solely oriented toward maximizing investment returns. The business case is straightforward: ESG taps into investors’ very real concerns about sustainability, while at the same time the lack of consistent standards and metrics defining ESG prevents low-cost passive ESG options from emerging. The result is that ESG can breathe new life into legacy active strategies, enabling managers to charge a premium for an attribute (ESG) that is not tied to investment returns (at least not near-term returns). In our analysis of U.S. mutual funds, the average asset-weighted management fee for “sustainable” funds was 51 basis points, compared with 38 basis points for the broader universe of active mutual funds. ESG commanded a 34% premium. Looking beyond fees and beyond the U.S., in Europe, ESG has become a non-negotiable investment criterion. European regulations and evolving investor preferences mean ESG is here to stay, and sustainable investing in general is fast becoming simply “investing.” To not incorporate sustainable criteria in an investment process will soon be considered negligence.

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