Europe leads the way in global sustainable investing, says Morningstar report

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Europe continues to lead the way in global sustainable investing, capturing most of the inflows, and making up the lion’s share – $2.1trn, or 83% – of global sustainable fund assets, at the end of 2022, according to Morningstar’s Global Sustainable Fund Flows report for Q4 2022.

The global sustainable fund universe is defined as open-end funds and ETFs that claim to focus on sustainability, impact, or ESG factors.

The report, which covers regional flows, assets and launches for the period, showed a gradual decline during 2022 of inflows into European funds for the first three quarters of the year.

But in Q4, inflows rebounded, amounting to $40bn, an increase of 88% on the previous quarter.

In contrast, European conventional funds continued to bleed assets, suffering $33.3bn of outflows in the last quarter.

At end-2022, sustainable funds accounted for 20% of European fund assets.

However, the report also reveals that the world’s second-largest sustainable fund market – the US – shed nearly $6.2bn over Q4, after previous quarters of fluctuating inflows and outflows.

Globally, sustainable fund flows have proved their resilience in the face of inflationary pressures, rising interest rates and lingering recession fears, attracting $37bn of net new money in the fourth quarter of 2022 – 50% higher than the $24.5bn in Q3.

This compares with the $200bn of net withdrawals in the broader market.

Hortense Bioy, global director of sustainability research at Morningstar, and lead author of the report, said the final quarter of 2022 reveals a divided picture.

She observed: “The rebound in global inflows into sustainable funds was driven by Europe, where investor appetite remains strong and supported by a favourable regulatory environment. The US ESG fund market, however, faced headwinds – macroeconomic of course, but also political, with prominent politicians speaking and acting against ESG investing.”

SFDR

Morningstar has also released its latest review of Sustainable Finance Disclosure Regulation (SFDR) article 8 and article 9 funds for Q4 2022.

According to the report, article 8 (light green) funds went back into the black in the fourth quarter of 2022, gathering €10.7bn of net new money. But article 9 (dark green) funds pulled in the lowest inflows on record, €5.1 bn, partly due to the recent wave of downgrades in the face of strengthened regulatory standards.

During the quarter, 307 products downgraded from article 9 to article 8, representing €175bn in assets, or 40% of the article 9 category.

Assets in article 8 and article 9 funds rose by 7.3% over the period to €4.6trn, pushing their combined market share higher to 55% of the fund universe.

Almost two-thirds (63%) of article 9 funds now plan to have more than 70% exposure to sustainable investments. But only 6.3% of article 9 funds target between 90% and 100%, and only 36 funds in the report’s sample aim for a 100% sustainable investment allocation.

The report said that just over one-quarter (27%) of article 8 funds with “sustainable” in their names would meet the European Securities and Markets Authority’s proposed rule on fund names, while the majority (92%) of article 9 funds would meet the requirement.

Bioy said that almost two years after SFDR came into force, the landscape of funds marketed as green in the EU is going through some radical changes.

“We expect the recent wave of article 9 fund downgrades to continue, raising questions about what will remain, and how useful that category will be,” she said. “Investors will increasingly look beyond Article 8 and Article 9, focusing instead on the level of exposure to sustainable investments, which cut across both classifications.”