New ALFI/Morningstar study charts rising demand from low base, with new launches lagging.
Assets in European impact funds increased by 50% in 2021 compared to 2020, as demand for the classification increases in the wake of greenwashing claims against funds elsewhere in the sustainable investment universe.
However, the European Sustainable Investment Funds Study 2022, compiled by Morningstar in collaboration with The Association of the Luxembourg Fund Industry (ALFI) and consultancy Zeb, showed that even following the increase only 1.5% of total European funds’ net assets currently follow an impact investing approach.
Furthermore, only 6% of funds domiciled in Luxembourg and rated by Morningstar were classified under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR), defined as dedicated to funds that have sustainable investment as their primary objective.
While overall assets in impact funds increased, the share of net flows directed to impact funds – as a proportion of total flows directed to sustainable funds – decreased slightly from 10% in 2020 to about 8% and 7% in Luxembourg and the rest of Europe, respectively.
Absolute flows to impact funds increased by 44% from €21.9 billion to €31.6 billion in 2021 on a total European level.
Results from the study also lent credence to the argument that full ESG integration comes about from active management, supported by the higher percentage of active funds in the impact funds category (80%) compared to the other sustainability fund categories (73%) in 2021.
But the report also noted that the share of passive investments “increased significantly” in both the impact and other sustainable funds sectors compared to 2020.
Overall, net assets in sustainable funds domiciled in Europe reached almost €2 trillion in 2021, three times as high as in 2019 and up 71% from 2020; the sector’s share in total net assets went up to 16%, attracting half of the net flows.
Funds that deliver on their promises
Impact funds have been viewed as an effective way to link investments to the UN Sustainable Development Goals (SDGs), with such funds typically linked to one or more of the goals and often focused specifically on combating climate change, which is UN SDG Goal 13.
Growth of the sector has been hampered by a lack of standardised frameworks for impact investing which is being addressed by initiatives including the Impact Taskforce and the UN-endorsed Impact Management Platform.
Earlier this month, Ashley Alder, Chair of the International Organisation of Securities Commissions, argued that impact measurements will increasingly inform disclosures made under the International Sustainability Standards Board’s reporting standards.
Impact funds are also often considered to have greater sustainable credentials than funds seek to manage ESG risks, with some providers facing criticisms of greenwashing. Asoka Woehrmann, DWS’ Group CEO, resigned this month following a raid by German police in connection with accusations of fraud relating to its ESG funds.
Hadewych Kuiper, Managing Director and Member of the Management Board at Triodos Investment Management, said: “To direct capital to places where it is most needed to generate positive impact, financial services providers need to deliver on their promises and should be held accountable for it.
“While it might seem lucrative in the short term to capitalise on the market appetite for sustainable products with offerings that are only sustainable in name, this behaviour will seriously damage trust in the sector as a whole.”
While a wider definition of ESG funds continued to represent the majority of new offerings in 2021, impact funds only accounted for 5% of new fund launches and repurposed funds. Even with the increased interest in impact investing, this amount is lower than compared to 2020, when impact was 9% of new offerings.
Impact funds are typically equities-focused, but there is a rising fixed-income presence in the market. According to ALFI, the share of fixed-income funds within the impact funds sector it increased from 20% in 2020 to 24% in 2021, while remaining flat elsewhere.
The study also found that Europe holds 83% of global sustainable funds’ net assets, reaching almost €2 trillion at the end of 2021, up 71% from 2020. Across Europe, about 44% of net assets were categorised by their managers as Article 8 or Article 9 funds under to SFDR.
Marc-André Bechet, Deputy Director General of ALFI, said: “Sustainable finance is at a crossroads and 2022 will lead to a moment of truth. While there is a genuine willingness of the asset management industry to meet the challenges of sustainable finance and strong demand from retail and institutional investors alike, the reality is that, so far, funds which pursue one or several environmental objectives have not really been able to show their true credentials.”
Funds were only considered as impact funds by the study if their investment strategy is solely directed towards impact investments without combining it with other strategies.