European sustainable investment funds study 2022: Hitting the road to a greener future
Europe remains the key driver behind sustainable finance, holding 83% of global sustainable funds’ net assets, according to the second annual European Sustainable Investment Funds Study by Morningstar and Zeb, powered by the Association of the Luxembourg Fund Industry (ALFI). The study found that the net assets in sustainable fund products based on Morningstar’s strict definition of sustainability have reached almost EUR 2 trillion at the end of 2021, up 71% from 2020.
This study aims to provide a snapshot on how sustainability objectives and the respective legislative interventions are shaping the fund industry in Europe, and to analyse the role, competitiveness, and positioning of the different domiciles within this dynamically changing environment. It is the second of a series of regularly conducted studies based on an analogous approach to monitor the dynamic development and trends of the European sustainable funds’ sector.
Key findings
- Europe holds 83% of global sustainable funds’ net assets, reaching almost EUR 2 trillion at the end of 2021, up 71% from 2020;
- Sustainable fund products reflect 16% of total net assets of funds domiciled in Europe, ahead of the US and Asia, with only 1% and 5% respectively;
- Luxembourg maintains its market leader position with about a third of the assets managed by sustainable funds in Europe being domiciled there;
- Equity remains the most important asset class making up 64% of the sustainable fund assets compared to 48% in conventional funds, allowing asset managers to exert a great influence on the ESG efforts of companies;
- Sustainability strategies such as impact funds are still far outweighed by funds with less ambitious ESG objectives, yet assets in impact funds did increase by 50% in 2021, compared to 2020;
- At European level, about 44% of net assets were categorised by their managers as Article 8 or Article 9 funds according to the Sustainable Finance Disclosure Regulation (SFDR).
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Other topics and findings from the research
- Equity remains the dominating asset class of sustainable funds across all European domiciles accounting for more than 60% of the sustainable assets managed by funds. Followed by fixed income (20%) and allocation funds (15%) at the end of 2021. This differs significantly compared to the conventional funds' sphere where the share in equity funds accounts for only 48% of the net assets. This disparity in sustainable funds is likely due to the more favourable possibility for engaging in stewardship in influencing companies’ behaviour towards sustainability targets.
- Sustainable passive strategies continue being popular – at the end of 2021, they made up about 27% of the net assets of the European sustainable fund universe, higher than the 21% observed in the conventional sphere. This compares with passive net assets of about EUR 139 billion in 2019 – an increase of almost 280% compared to only about 25% in the conventional funds sector over the period of 2019 to 2021. It seems that passive management is switching from traditional, plain vanilla approaches to sustainability
- A marketplace continually dominated by large players with the high concentration in the asset management industry even higher in the sustainable funds’ segment. On average 51% of the net assets in sustainable active funds in Europe was invested in funds launched by the top 20 providers as opposed to only about 43% for conventional funds. In terms of single fund hubs, Luxembourg and Ireland show a strong positioning of the top fund providers in either market. The top 5 asset managers cover approximately 32% of net assets in Luxembourg-domiciled sustainable funds.
- Closing the gap: what are the roadblocks in the US and Asia: Despite considerable interest in sustainability in the US, the previous US government’s decision to pull out from the Paris Climate Accord likely made investors, shareholders and the regulator move sustainability to the bottom of the agenda. The signature of President Biden in 2021 to re-enter the Climate Agreement is an important step towards a common global goal, although the previous deviation might have made the US lose significant ground in its race towards net zero. Meanwhile in Asia, there is a lack of an ESG framework based on classifications or disclosures that allows for standardisation and benchmarking in markets.
The rapidly growing demand for sustainable investing from society and the asset management industry, supported by regulations, means the market share of sustainable funds will only further increase. Eventually, sustainable funds will become the norm rather than the exception.
