Equities and Europe Dominate Sustainable Funds

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    Stockholm (NordSIP) – According to a recent study on sustainable investment funds by Morningstar and zeb, a leading strategy, management and IT consultancy based in Germany, Europe remains the main driver of sustainable finance growth. The European Sustainable Investment Funds Study 2022 is supported by the Association of the Luxembourg Fund Industry (ALFI). This is the second time this study is conducted.

    The market review covers open-end funds, including UCITS and regulated AIFs as well as ETFs domiciled in the EU-27 countries, Switzerland, Liechtenstein, Norway and the United Kingdom. The analysis considers approximately 33,200 funds for 2021, of which about 4,400  are sustainable funds.

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    Europe Leads the Way

    The market study finds that Europe holds 83% of global sustainable funds’ net assets, up 71% from 2020 and reaching almost €2 trillion at the end of 2021. According to the study, about a third of the assets managed by sustainable funds in Europe are domiciled in Luxembourg, the leading European country in sustainable funds, reportedly. Moreover, sustainable fund products represent 16% of total net assets of funds domiciled in Europe, with the US and Asia, only accounting for 1% and 5% respectively. Europe’s leadership appears to be driven in large part by the USA’s exit of the Paris Agreement during the Trump administration.

    “Sustainable finance is at a crossroads and 2022 will lead to a moment of truth. While there is a genuine willingness of the asset management industry to meet the challenges of sustainable finance and strong demand from retail and institutional investors alike, the reality is that, so far, funds which pursue one or several environmental objectives have not really been able to show their true credentials. However, companies are now starting to report on the alignment of their activities in line with the Taxonomy Regulation, and for those that do not yet do so, reporting will be required from 2023 and 2024 onwards. Which I believe is a crucial step forward,” Marc-André Bechet, Deputy Director-General of ALFI, said.

    Equities’ Appeal

    At 64% of sustainable fund assets, the study shows that equity remains the most important asset class making up sustainable investments. At the end of 2021, fixed income funds and allocation funds represented another 20% and 15% of sustainable fund assets, respectively. According to the study, the disparity between sustainable and conventional funds, where equity funds account only for 48% of the net assets, may be due to the opportunities for stewardship and engagement equity investments provide to influence companies’ behaviour towards sustainability targets.

    “Our new study confirms the forecasts we made in our previous edition: the industry’s shift towards sustainability is progressing at high speed despite an unprecedented dynamic geopolitical and regulatory environment. Although there is still quite a long way to go before the full potential of the fund industry in supporting the urgently needed transformation process of the economies toward greater sustainability is unleashed, it is safe to conclude that the trends highlighted will continue – despite the critical discussion about the role and handling of sustainability by individual asset managers, the ongoing need to clarify sustainability factors and their appropriate implementation, and the recent setbacks in tackling climate change due to the tragic conflict in the Ukraine and its drastic consequences not only for the people but also the global economy,” Dr Carsten Wittrock, Partner at zeb, concluded.

    SFDR Reporting

    Sustainability strategies such as impact funds are still less important than funds with less ambitious ESG objectives, yet assets in impact funds did increase by 50% in 2021, compared to 2020, according to the study. Regarding their Sustainable Finance Disclosure Regulation (SFDR) classification, about 44% of net assets domiciled in Europe were categorised by their managers as Article 8 or Article 9 funds.

    “Since its introduction in March 2021, SFDR has acted as a catalyst for product development and innovation in the European sustainable funds’ space. It will be fascinating to see how regulation continues to shape the landscape. The changes to MiFID II taking effect in August and requiring financial advisers to consider their clients’ sustainability preferences have the potential to accelerate the adoption of sustainable investments among retail investors. Despite all the concerns about greenwashing, our data shows that investor appetite for ESG and sustainable strategies is still growing,” Hortense Bioy, Global Director of Sustainability at Morningstar commented.

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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