Sustainable funds have grown significantly in the past few years, according to a new study. Sustainable funds’ net assets have increased by as much as 450% since 2018, rising sharply as a share of total fund assets.
Net new money invested in such funds was positive Europe-wide, up 50% in June 2021, reflecting 510% increase of net new money into sustainable funds over the 2018 level.
Luxembourg continued to demonstrate its leading position as a fund location. In net new asset terms, 23% of the funds domiciled in Luxembourg are held in sustainable funds compared to 15% in the rest of Europe. In terms of net new fund flows, Luxembourg’s are disproportionately high: 67% in 2020 and 47% in the first six months of 2021 flowed into sustainable funds.
These figures were included in the very first European sustainable investment funds study, prepared by zeb Luxembourg, Morningstar and ALFI and presented at the recent ALFI Global Distribution Conference. “Our study aims at providing a snapshot of how the sustainability objective and the legislative intervention have shaped the fund industry in Europe in the last years, with a particular focus on the role, competitiveness and positioning of the Luxembourg fund hub,” explained Arnd Hesseler of zeb.
Impact funds limited
According to the report, investments in more ambitious impact funds are still very limited at 1% of the total volume as of December 2020. But the share of these impact funds is rising, “which means that investors are increasingly paying more attention to these funds,” Hesseler commented. At the end of June 2021, impact funds accounted for 13% of the total volume of sustainable funds.
Given the success of sustainable investment funds, asset managers have been repurposing existing conventional funds by adding binding ESG criteria to their investment objectives and rebranding the funds. During the first half of 2020, over 700 funds were rebranded in Luxembourg alone, which is 2.5 times the 2020 volume.
About a quarter of the funds distributed in the EU were, as of early July, classified as Article Eight or Nine under the SFDR. The vast majority of these were classified under the less-stringent Article Eight, according to a Morningstar study entitled “SFDR: Four Months After its Introduction”. In terms of assets, Article Eight and Nine funds represent a bigger share of the EU fund universe, at 34%. Combined assets for both Eight and Nine funds amounted in July to 3 trillion euros.
Numbers expected to increase
“We expect these numbers to increase as asset managers continue enhancing their existing strategies, reclassifying funds and launching new ones that meet Article Eight and Nine requirements,” said Hortense Bioy of Morningstar, who presented her employer’s report, saying these funds could amount to half of total assets covered by SFDR “by the middle of next year, if not earlier.”
The Morningstar study found that active management dominates the post-SFDR ESG fund landscape, with passive funds only accounting for about 10% of Eight or Nine funds. Bioy explained that this is half the market share for passive funds in the overall European fund universe.
Bioy presented a slide showing the top 20 asset managers with the largest Article Eight and Nine fund assets. Amundi tops the table with 6.5% market share, followed by Nordea and Swedbank, with JP Morgan coming in fourth position.
Different approaches based interpretation
Bioy explained that “asset managers have taken different approaches based on their own interpretation of the regulation”, leading to a wide range of ESG approaches in SFDR classified funds. This leads to Article Eight being a catch-all category. “The wide range of approaches found in both type of articles has raised concerns that SFDR may have given the opportunity to some asset managers to greenwash funds that were not marketed as a green before.”
Nevertheless, funds in either Eight or Nine have a lower ESG risk than the rest of the fund universe.
Speaking of the Sustainable Investment Funds Study, Hesseler described the “main takeaway” as: “The regulators’ objectives to use the fund industry as a catalyst to implement the EU’s taxonomy objective seems to be working. Nevertheless, you’re still at the very beginning of a huge transition phase. Numerous topics still need to be clarified, for example, the criteria that qualify a fund for marketing as sustainable in a regulatory sense.“