European investors continue to channel funds into sustainable investments, recognizing the enduring appeal of sustainable UCITS funds. In 2023 alone, an impressive one trillion euros flowed into European Article 8 and 9 funds. This trend is expected to attract more investors towards sustainable funds in the years ahead.
PwC anticipates this growth, having published a new report on the fund market this week. By the end of 2023, sustainable UCITS funds held approximately 6.2 trillion euros, a figure projected to climb to a staggering 9 trillion euros by 2027.
«Since the introduction of the SFDR in 2021, sustainable investments have mushroomed and continue to remain on investors› radar», says Frédéric Vonner, a partner at PwC in Luxembourg. «We do not foresee a slowdown in the inflow to sustainable investments, expecting about 9.4 trillion euros to be invested in Article 8 and 9 funds by 2027.»
Vonner notes a shift in the preference within sustainable strategies. Investors continue to favor equities, but there is growing popularity in money market funds and ETFs. Currently, nearly a quarter of the total assets in European ETFs are in sustainable trackers, according to PwC.
American entities active on European market
American entities are notably prominent in the European market, with giants like BlackRock, JPMorgan, and Amundi managing between 322 to 433 billion euros in Article 8 funds. Amundi leads with an impressive 521 Article 8 funds in its portfolio, significantly ahead of BNP Paribas and DWS. However, it was Morgan Stanley’s USD Liquidity fund that saw the largest inflow among Article 8 funds last year.
Pictet, Handelsbanken, and Candriam dominate in the realm of Article 9 UCITS funds, managing assets ranging from 24 to 25 billion euros. Dutch firms also show strong performance; Robeco, for instance, has nearly 11 billion euros across eighteen Article 9 funds. Triodos and ASN›s managed assets in their Article 9 funds are nearing four billion euros, with Triodos offering twelve Article 9 funds. Candriam leads with thirty Article 9 funds. By the end of 2023, there were almost 10,500 Article 8 UCITS funds and 963 Article 9 funds.
Active vs passive
Notably, most sustainable funds remain actively managed, PwC observes. The number of European Article 9 ETFs even saw a slight decrease in 2023 from the year before. The most successful ESG ETF in Europe was JPMorgan’s US Research Enhanced Index Equity, which attracted over two billion euros last year. Nonetheless, the largest sustainable UCITS ETFs by size continue to be two iShares MSCI USA trackers from BlackRock, managing between 7.3 to 7.7 billion euros.
Luxembourg remains the most popular base in the European Union for ESG funds, with nearly 61% of Article 9 funds being established there. Ireland, France, and Sweden are also favored locations.
Investors cautious
Despite the positive inflow into sustainable UCITS funds in 2023, Morningstar earlier observed a cautious approach from investors towards ESG investments following underperformance in 2022. The renewable energy sector, for example, has been particularly impacted by rising financing costs, inflation in material prices, and supply chain disruptions. Other deterrents include concerns over greenwashing and evolving regulations. The wave of fund reclassifications from Article 9 to Article 8 at the end of 2022, along with other issues related to the implementation of SFDR, has sown confusion among investors and market participants.
PwC expects more clarity around European sustainability regulations in the coming years. «With the continuous tightening of SFDR, investors can expect more clarity and standardized solutions regarding sustainable investments in the years ahead», Vonner explains. «This will only serve to further bolster its growth in the European Union.»