Sustainable funds in Europe more than doubled since 2018 and have attracted 52% of all net new flows in 2020, according to the first annual European Sustainable Investment Funds Study by Morningstar and zeb, on behalf of the Association of the Luxembourg Fund Industry (ALFI).
This reflected 11% of total net assets domiciled in Europe at the end of 2020.
The study found that equity remains the top asset class of sustainable funds across all European domiciles comprising over 60% of sustainable assets managed by funds.
Inflows into impact funds are also rising at the expense of less ambitious sustainable strategies
Passive investments also increased in the period, constituting 21% of the net assets in the European sustainable fund universe by the end of 2020
In addition, share of sustainable assets in UCITS and regulated open-end alternat8ve investment funds has risen significantly in the past three years, accounting for 11% and 9% of total assets respectively
To date, a few large asset managers continue to dominate the sustainable funds market with more than 50% of net assets in sustainable funds in Europe launched by the top 20 providers.
Luxembourg was highlighted as the leading domicile, with sustainable funds accounting for €371 bn by the end of 2020 and capturing 44% of total net flows made across all European jurisdictions.
“Despite differences and nuances of approach across jurisdictions, asset classes and investment styles, the trend towards sustainable funds has reached a point of no return, with sustainable funds attracting more than half of net new flows in 2020,” said Deputy Director General of ALFI.
Hortense Bioy, Global Director of Sustainability Research, Manager Research at Morningstar added, “The European sustainable investment landscape continues evolving extremely rapidly. Record ESG fund flows, assets, and product development activity, combined with the most ambitious regulatory agenda, all herald a new era for sustainable investing in Europe.
She said, “ESG funds can no longer be seen as a niche area of the European funds landscape. Asset managers have started reporting high numbers of ‘green’ funds in accordance with the Sustainable Finance Disclosure Regulation (SFDR).”
Interpretations of the new regulation vary and the debate around what constitutes a sustainable investment is far from being settled. But we can confidently expect that, from 11% today, ESG funds will be representing a much larger share of the overall fund market in the coming years.”
Dr. Carsten Wittrock, Partner at zeb, noted “The governments’ and regulators’ objective of using the fund industry as a catalyst to create a greener Europe seems to be working. The sustainability trend has taken off and will continue to intensify – although numerous topics still need to be clarified, such as the inhomogeneous interpretation of the criteria that qualify a fund as sustainable in a regulatory sense.
He added, “The hope is that ratings and other tools will allow for a more differentiated view and transparency in order to ensure that capital is allocated in the right direction in a sustainable sense.”
The study also found a transition to a more regulated sustainable finance marketplace. It pointed out that legislators have been addressing challenges such as the absent of common definition of ESG criteria or the lack of transparency on how sustainability risks and targets are managed by corporations and how ESG factors are incorporated in financial organisations’ investment decisions.
The report also highlights the need for transparency of rating methodologies and suggestions by the European Securities and Markets Authority (ESMA) to the European Commission to take legislative action to regulate ESG ratings in the future, given the disparity between different ratings providers leading to a risk of greenwashing.
©Markets Media Europe 2021
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