The number of environmental, social and governance (ESG) funds grew at more than double the rate of non-ESG funds during the past five years in the UCITS market, according to EFAMA’s new report.
UCITS refers to a regulatory framework that allows for the sale of cross-Europe mutual funds. Experts say UCITS funds are perceived as safe and well-regulated investments and are popular among many investors looking to invest across Europe.
In the report “ESG Investing in the UCITS Market – A powerful and inexorable trend”, the European Fund and Asset Management Association (EFAMA) says there has been significant acceleration in this space since 2017.
The report looks at the major trends in the ESG UCITS market, the impact of the coronavirus pandemic, and the behaviour of ESG and non-ESG funds.
During the past five years, equity and bond ESG fund assets increased by 197 per cent and 181 per cent, respectively, in this period, says EFAMA.
The growth is said to reflect both the creation of new funds and the integration of ESG criteria into the investment process of existing funds.
For net assets and net sales, ESG funds saw their assets increasing by 37.1 per cent in 2020 to reach €1.2 trillion at end-December. Net sales of ESG funds grew from €19.5 billion in 2016 to €235 billion in 2020.
The report also notes that passive funds represent 20 per cent of net assets held in the total ESG fund universe, while 80 per cent of assets are actively managed.
Reflecting a similar balance, EFAMA explains 17 per cent of funds in the non-ESG fund universe are passively managed and 83 per cent are actively managed funds. Exchange traded funds account for 8 per cent of the total ESG fund universe, compared to 9.2 per cent in non-ESG.
Looking at asset classes, the report highlights that equity funds dominate the ESG space, representing 56 per cent of the fund universe at the end of December 2020 compared to 39 per cent within non-ESG funds.
Elsewhere, EFAMA reveals that environmental funds dominate the impact fund category, with funds focusing on low carbon emissions being the most dominant category (55 per cent) and renewable energy funds exhibiting the highest growth (604 per cent) since 2016.
During the same period, social funds experienced substantial growth in demand (340 per cent), highlighting the growing popularity of social topics in sustainable investing, according to the report.
EFAMA also says the performance of ESG and non-ESG funds has been broadly similar since 2016, the exception being 2020 when ESG equity and bond funds recorded a higher average gross performance.
This finding confirms that, on average, investors do not have to sacrifice long-term returns to support the transition to a more sustainable economy.
The report shows that the differences between the performance of the top and bottom ESG and non-ESG funds are quite large, reflecting the fact that the universe of funds is made up of many different funds in terms of investment strategy.
Further highlights in the report suggest that ESG funds, on average, tend to be slightly cheaper than non-ESG funds.
The association stipulates that this situation can be explained by the fact that many ESG funds have been launched recently in the context of stiff competition among fund managers, who also have a strong incentive to limit ongoing charges to attract investors.
“Our new market insights shows that the ESG market has quite possibly reached a turning point in 2020. New regulatory measures, such as the Sustainable Finance Disclosure Regulation (SFDR) that came into force [10 March 2021], intend to enhance comparability and trust for investors in ESG funds, as well as hold market participants accountable and avoid greenwashing,” says Tanguy van de Werve, EFAMA director general.
According to Werve, promoting confidence in this market can increase participation, especially from retail investors, thereby further accelerating the trend we observe.
He continues: “It is crucial that the investment management industry continues to engage with policymakers to ensure the development and implementation of regulations and standards that enable market participants to fully contribute to the ESG agenda.”
Vera Jotanovic, senior economist at EFAMA, adds: “The ESG funds universe has been growing rapidly since 2016, in parallel with the awareness of the importance of the sustainability agenda. The development of ESG funds has become a priority for many in the industry and their resilience during last year’s covid-induced market stress has contributed to further accelerating the growth trend.
