The sustainable fund market in Luxembourg and other European fund domiciles has continued its strong growth of recent years, but the short-term impact of the Ukraine war has already disrupted the move to a green future. Still, positive developments are expected in the longer term. The latest updates were set out in the 2022 edition of the European Sustainable Investment Funds Study by Zeb and Morningstar on behalf of the Association of the Luxembourg Fund Industry.
Luxembourg, as the largest European fund hub, has maintained its market leader position in sustainable fund products, with about a third of assets in sustainable funds domiciled there. Competing financial centre Ireland has a leading position as a hub for both sustainable and conventional passive funds.
Reaching new heights in assets
The study showed that at the end of 2021, the net assets in sustainable fund products as defined by Morningstar, limited to those meeting the firm’s “strict definition of sustainability”, reached almost 2 trillion euros, an amount triple the 2019 level, and up 71% from the situation in 2020. Sustainable funds made up 16% of the total net assets of funds domiciled in Europe at the end of 2021, and attracted half of the net new money entering the investment fund market in 2021.
Europe has an 83% share of global sustainable funds’ net assets and is considered the sustainability driver of the fund industry, far ahead of both the US and Asia, where the share of sustainable funds’ net assets in total net assets domicile in those regions was only 1% and 5% respectively. “Nevertheless, climate change, new regulatory requirements and changing investor practices will see these regions increasingly catch up in the future,” said the report.
The rise of investment is seen in both Ucits and AIF funds, though to a lesser extent in the latter. Equity funds are the largest asset class for sustainable funds, making up 64% of the total, versus only 48% for conventional funds. Fixed income has seen increasing interest.
Sustainable passive funds soar
Net assets held by sustainable passive funds have soared in the past three years, increasing by 280%, representing 27% of the total sustainable fund sector at the end of 2021 . This compares to a 21% share in conventional funds, which only grow by 24% over the same period.
The most sustainable kind of fund, the impact funds still find themselves behind funds with less ambitious goals. Only 1.5% of total European funds net assets use an impact investing approach. However, assets invested in such funds increased by half in from 2020 to 2021, revealing a demand for the most ambitious approaches.
The report also included comments from thought leaders from the sustainability finance world.
Standardise the taxonomies
Julie Becker, Chief Executive Officer of the Luxembourg Stock Exchange, argued for standardisation of the various sustainable investing taxonomies. “The lack of standardisation of the underlying methodology of different taxonomies is likely to lead to fragmentation in the market,” she said.
Hadewich Kuiper, Managing Director and member of the management board of Triodos Investment Management, spoke about the importance of preventing greenwashing. “To direct capital to places where it is most needed to generate positive impact, financial providers need to deliver on their promises and should be held accountable for it,” despite the seeming allure profits from “offerings that are only sustainable in name”.
Short-term problems
The report also discussed the near future for sustainability in general, describing how the Ukraine war, following the impact of the Covid pandemic, is having an unclear long term impact on the economy and financial markets. “In any case, the energy price hikes triggered by the war and the corresponding sanctions, combined with the discussion about securing energy supplies, have both negative and positive short- and medium-term effects on the objective to make the global economy a more sustainable marketplace.”
Once short term security-related issues are dealt with, “the acceleration of the shift away from traditional, unsustainable energy sources is to be expected in the long term as many countries try to reduce their dependence on fossil energy carriers the supplying countries.”
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