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ESG demand prompts more than 250 European funds to change tack

ESG investing

ESG demand prompts more than 250 European funds to change tack

Repurposing helped push European sustainable AUM to €1.1tn by the end of 2020

In addition to the repurposed vehicles, there were 505 new ESG fund launches over the year © MARK R CRISTINO/EPA-EFE/Shutterstock

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Rising demand for “sustainable” investment prompted managers to change the strategy or investment profile of 253 European funds in 2020, helping to push regional assets invested in funds with an environmental, social or governance tilt to a record €1.1tn by the end of December, data from Morningstar show.

In addition to the repurposed vehicles there were 505 new ESG fund launches in Europe over the year.

Passive funds were a strong driver of the growth in assets, accounting for 22.5 per cent of the ESG market in Europe by the end of 2020. “The market share of sustainable ETFs has grown in the last couple of years. It’s booming,” said Hortense Bioy, global head of sustainability research at Morningstar.

Data suggest investors flocked to ESG funds last year with European sustainable funds enjoying a particularly strong 84 per cent quarter-on-quarter rise in inflows in the three months to the end of December, according to Morningstar.

That feverish interest has encouraged managers to introduce ESG criteria to existing funds, industry figures say.

Morningstar data also show that 87 per cent of the 253 repurposed funds, which claimed to have added ESG criteria to their investment objectives and/or policies, also rebranded themselves, adding terms such as “sustainable”, “ESG”, “green”, or “socially responsible investment” to their fund title.

“Once a fund is marked with a sustainable investment label, it makes it more accessible to some pension funds and other big investors that are looking for that label,” said Anaëlle Ubaldino, head of ETF research and investment advisory at TrackInsight, a data provider.

However, there is no global consensus on what constitutes an ESG fund and investors might not have a clear understanding of what the acronym ESG refers to, said Wolfgang Kuhn, director of financial sector strategies at ShareAction, a responsible investment group.

“ESG integration is a completion of risk analysis to systematically integrate these risk factors. The problem comes from the fact that this is not the same as being green or following the SDGs [the UN’s Sustainable Development Goals] or focusing on adverse impacts of your investments,” he said.

There are some hopes that the EU’s new investment taxonomy will bring more clarity to the situation when its Sustainable Finance Disclosure Regulations come into effect on March 10.

“We’re getting somewhere with the new standard of financial disclosure regulation by making sure that if you call yourself ESG, you explain what it is. And if you call yourself a force for good, then you really have to show it,” Kuhn said.

Sustainable investments in Europe accounted for the 80 per cent of the $152.3bn global ESG fund inflows in the fourth quarter of 2020, followed by US ESG funds that attracted 13.4 per cent.

ESG-focused ETFs got off to a strong start in January, pulling in $15.7bn of new assets globally, according to TrackInsight.

While there might be some misgivings about recently changed funds, Bioy said Morningstar ESG fund ratings should reassure investors: “The percentage of repurposed funds that get our highest ratings is very similar to those funds that were not repurposed and launched as ESG.

“I would not think that there is a significant difference between the two in terms of ESG risk.”

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