Sustainable funds more than doubled in the last three years

Sustainable funds is the fastest growing segment in European asset management, according to a new report.

The first annual European Sustainable Investment Funds Study by Morningstar and management consultancy zeb, with Association of the Luxembourg Fund Industry (ALFI) found that in the past three years, net assets in sustainable fund products had more than doubled.

These funds now attract more than half (52%) of all net new flows and represent 11% of total net assets domiciled in Europe at the end of 2020.

“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,” said Hortense Bioy, global director of sustainability research at Morningstar. “ESG funds can no longer be seen as a niche area of European fund management,” said Bioy, “but the next stage will involve work to define the meaning of sustainability.”

“The governments’ and regulators’ objective of using the fund industry as a catalyst to create a greener Europe seems to be working,” said Dr Carsten Wittrock, a partner at zeb. “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.”

Equity funds lead the charge across all European domiciles, accounting for more than 60% of sustainable assets managed by funds. Impact funds are also seeing increased inflows, with assets being diverted from less ambitious sustainable strategies.

Passive investments continue to rise, making up more than a fifth (21%) of the net assets in the European sustainable fund universe at the end of 2020.

More than half the assets in sustainable funds remain concentrated within the top 20 providers.

Most of those funds were domiciled in Luxembourg, with sustainable funds accounting for €371 billion, or 44%, of total net flows made across all European domiciles in 2020 by the end of the year.

The report also looked at the classification of sustainable investments, taxonomy issues and the need for a standard methodology to improve the transparency of ESG ratings.