European ESG Fund Launches Outpaced Narrow Sustainability Themes in 2020

ESG fund inflows rose by more than 80% and assets surged by half, according to Morningstar.

Asset managers favoured fund launches with broad environmental, social and governance (ESG) scope, ahead of vehicles with more targeted themes, such as impact or climate risk, a 2021 report by research and data provider Morningstar has found.

Declaring that a pivotal point in sustainable investing was reached with the Covid-19 crisis in 2020, the firm said: “More asset managers than ever are now incorporating ESG factors into their investment processes and purposefully engaging with investee companies on material issues ranging from climate change to employee treatment, supply chain oversight, and diversity and inclusion”.

As many as 505 funds were launched in 2020 and 253 conventional funds rebranded, the report said. Out of the newly launched funds 372, were broad ESG funds.

Flows into European ESG funds soared by more than 80% in 2020 to €233 billion, from €126 billion in 2019, prompting total assets in European sustainable funds to surge to €1.1 trillion in December 2020.

However, the funds which saw top inflows in the fourth quarter of 2020, were energy and environmental funds.

The iShares Global Clean Energy ETF, the Handelsbanken Hållbar Energi and the Pictet – Global Environment Opportunities fund attracted vastly more than €1 billion of inflows each.

The strong increase in flows was supported by the European Commission laying the foundations for its Sustainable Finance Action Plan, finalising for example a climate benchmark regulation and pushing other sustainability-related legislation forward.

Citing a previous report, Morningstar said that sustainable funds have delivered superior returns on average relative to their traditional peers in the past 10 years and also during the Q1 2020 Covid-19 market selloff.

“While these statistics do not necessarily comment on whether or not ESG as an investment style is a unique factor, it is clear that ESG strategies have generally been leaning into well-performing factors and that this, in part, has led to some of their recent investment outperformance,” the report concluded.

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