ESG investing is the most significant development in money management since the creation of the exchange-traded fund two decades ago and it will reshape finance just as passive funds have.

That’s the finding of a new report from PwC that forecasts as much as 57 per cent of mutual fund assets in Europe will be held in funds that consider environmental, social and governance factors by 2025, or 7.6 trillion euros (US$8.9 trillion), up from 15.1 per cent at the end of last year. In addition, 77 per cent of institutional investors surveyed by PwC said they plan to stop buying non-ESG products within the next two years.

With racial and economic injustice, as well as climate change, becoming key societal issues in recent years, financial firms have been forced to pay greater attention to their own contributions to making the world fairer and greener. That has primarily manifested in an explosion of ESG funds with money managers of all stripes, from pension funds to private equity firms and hedge funds, hiring sustainability teams, rolling out new products and touting their green credentials.

“ESG is nothing less than an all-encompassing shift in the investment landscape; placing financial and non-financial performance criteria on a level playing field,” PwC said in the report published Monday.

ESG funds are proliferating in Europe because regulators and policy makers have made green issues a top policy priority and are creating a rulebook to ensure financial firms incorporate sustainability into their operations and root out so-called greenwashing. At the same time, growing public awareness of ESG-related risks — which has been accelerated by Covid-19 — and the emergence of a generation of investors who prioritize non-financial impacts alongside financial factors, has fueled the growth, according to PwC.

The performance of ESG funds relative to their traditional peers in recent months also has caught investors’ attention, said PwC. Fund managers from BlackRock Inc. to Allianz Global Investors and Invesco have said ESG portfolios outperformed during the Covid-19 sell-off.

“These catalysts are set to usher in the greatest shift the European asset and wealth management industry has ever undergone; presenting managers with the opportunity to drive change by playing a key role in mitigating climate risk,” PWC said.

PwC forecasts ESG equity funds will see a compound annual growth rate of 26.8 per cent, with assets quadrupling to more than 3.6 trillion euros by 2025. Bond funds will grow at a rate of 30.4 per cent and assets will exceed 1.6 trillion euros in five years time.The consulting firm’s report, which was published by its Luxembourg unit, also featured a survey of 200 asset managers, 300 institutional investors and more than 800 retail investors.

The study found that 37 per cent of institutional investors are willing to pay a premium for ESG products, with the majority of them ready to pay between 21 basis points and 40 basis points extra. It also revealed that that while 77 per cent of institutional investors plan to stop investing in traditional non-ESG compliant products within the next two years, only 14 per cent of asset managers indicated plans to stop launching these products in the same time period.

PwC said Europe dominates the global ESG landscape, with the region’s 4,741 ESG mutual funds holding almost 70 per cent of global ESG assets. And while PWC said it expects the impact of Europe’s green fervor to stretch beyond its borders as new requirements are imposed on non-E.U. companies and investors, U.S. asset managers face possible limits on green investing.