L-R: Marc-André Bechet, Deputy Director General of ALFI; Dr. Carsten Wittrock, Partner at zeb; Hortense Bioy, Global Director of Sustainability Research, Manager Research at Morningstar; Credit: ALFI / zeb / Morningstar

Sustainable funds represent a rapidly growing segment of investment solutions in Europe, according to the first annual European Sustainable Investment Funds Study by Morningstar and zeb, powered by the Association of the Luxembourg Fund Industry (ALFI).

The study found that net assets in sustainable fund products have more than doubled since 2018, attracting 52% of all net new flows and reflecting 11% of total net assets domiciled in Europe at the end of 2020. Luxembourg was highlighted as the leading domicile, with sustainable funds accounting for €371 billion by the end of 2020 and capturing 44% of total net flows made across all European domiciles in 2020.

“This study contains a wealth of information on sustainable funds in Europe and is a must-read for anyone interested in sustainable finance. Despite differences and nuances of approach across jurisdictions, asset classes and investment styles, the trend towards sustainable funds has reached a point of no return, with sustainable funds attracting more than half of net new flows in 2020", commented Marc-André Bechet, Deputy Director General of ALFI. "Thanks to its ecosystem and its long-standing expertise in sustainable finance, Luxembourg appears as a market leader with €371 billion net assets and capturing 44% of net new flows in sustainable funds in 2020”.

Hortense Bioy, Global Director of Sustainability Research, Manager Research at Morningstar, added: “The European sustainable investment landscape continues evolving extremely rapidly. Record ESG [environmental, social and governance] fund flows, assets, and product development activity, combined with the most ambitious regulatory agenda, all herald a new era for sustainable investing in Europe. ESG funds can no longer be seen as a niche area of the European funds landscape. Asset managers have started reporting high numbers of ‘green’ funds in accordance with the Sustainable Finance Disclosure Regulation (SFDR). Interpretations of the new regulation vary and the debate around what constitutes a sustainable investment is far from being settled. But we can confidently expect that, from 11% today, ESG funds will be representing a much larger share of the overall fund market in the coming years”.

Equity remained the top asset class of sustainable funds across all European domiciles amounting for more than 60% of sustainable assets managed by funds. Inflows into impact funds were also rising at the expense of less ambitious sustainable strategies.

In addition, the study revealed an increase in passive investments, which constituted 21% of the net assets in the European sustainable fund universe by the end of 2020.

According to the study, the share of sustainable assets in Undertakings for Collective Investment in Transferable Securities (UCITS) and regulated open-end alternative investment funds (AIFs) has risen significantly since 2018, accounting for 11% and 9% of total assets in each sub-segment respectively.

The sustainable funds market continued to be dominated by a few large asset managers, with more than 50% of net assets in sustainable funds in Europe launched by the top 20 providers.

Dr. Carsten Wittrock, Partner at zeb, concluded: “The governments’ and regulators’ objective of using the fund industry as a catalyst to create a greener Europe seems to be working. 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. The hope is that ratings and other tools will allow for a more differentiated view and transparency in order to ensure that capital is allocated in the right direction in a sustainable sense”.

The study aims to provide a snapshot on how sustainability objectives and the respective legislative interventions have shaped the fund industry in Europe in the last years with a particular focus on the role, competitiveness and positioning of the Luxembourg fund hub. It was supported by a number of interviews and contributions from leading representatives of the fund industry.