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Behind the numbers: A look at sustainable funds in H1

It was another strong six months for sustainable funds in Europe. In the first half of 2019, more money poured into them and assets reached a new record. Also, more products hit the shelves, making it easier than ever to invest for sustainability and impact.

Let’s start with flows.

Sustainable funds pulled in net flows of €37bn (£34bn) in the first half of 2019, more than in any past semi-annual period. It also closes in on 2018’s net flows of €38bn (£34.9bn) for the full year.

Notably, sustainable equity funds have experienced inflows while conventional equity funds have had net outflows over the past year.

These numbers confirm the growing popularity of strategies that incorporate environmental, social and governance considerations. Sustainable investing is fast becoming a mainstream pursuit.

Supported by strong flows as well as positive stock market returns, sustainable fund assets also reached a record level of €595bn (£547bn).

Meanwhile, product development continued apace, as asset managers position themselves to take advantage of growing investor demand. As many as 168 new sustainable funds came to market in the first half of 2019. The industry is on track to match or even exceed the record of 305 new offerings for the whole of 2018.

Several of the equity fund launches were impact and theme-oriented with a focus on companies that contribute to the achievement of the Sustainable Development Goals. BMO SDG Engagement Global Equity fund, for example, targets multiple themes including poverty, inequality, climate change, prosperity, peace and justice, while Mirova Women Leaders Equity fund focuses on gender diversity and empowering women.

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Amid growing concerns about climate change, a host of climate-related funds came to market as well. For example, UBS Equities Global Climate Aware fund is overweight companies that are well positioned to transition to a low carbon economy and underweights those that are not committed to this transition.

While most of the growth in the number of sustainable funds has come from new launches, asset managers have also repurposed and renamed existing funds.

A number of funds changed mandates to make ESG their primary focus and reflected this transformation by rebranding the fund. The largest surge in this activity happened between 2017 and 2018 with a slowdown into the first half of this year.

Today, there are more than 2,230 sustainable fund available to European investors, covering an ever-expanding range of asset classes and sub-asset classes.

Of course, sustainable funds are certainly not all alike. They take varying approaches. Some employ values-based exclusions to narrow their investment universe, while others use specific ESG criteria to select securities. Some focus on environmental sustainability themes. A growing number of strategies aim to deliver impact alongside financial return by focusing on companies that have a net positive impact on society. Many use a combination of these approaches.

Sustainable funds, however, are becoming increasingly difficult to distinguish from traditional funds.

Today more asset managers integrate ESG into their standard investment process. They complement traditional financial analysis with sustainability-related insights to reduce risk and enhance long-term returns. They also actively engage with portfolio companies to improve business practices.

At the same time, asset managers are expanding the list of sectors and activities they wish to screen out from their traditional funds’ investment universe. Controversial weapons used to be the only common exclusion. But today, tobacco and thermal coal have been added to many exclusion lists.

The line between traditional and sustainable investments has never been so blurred, causing confusion among investors, and making the task of categorising funds a greater challenge.

Despite this blurred line, we believe sustainable funds have plenty of room to grow. Their assets under management and flows, though both higher than ever before, remain small compared with the overall European fund universe. Regulation will play an important role in shaping the future of this sector. European regulators are taking steps both to increase the role of financial markets and products in meeting macro ESG goals and in ensuring that financial products do not mislead investors about the extent and nature of their purported ESG ambitions.

Hortense Bioy is director of passive strategies and sustainability research at Morningstar


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