Morningstar: Q2 sustainable fund flow decline not a ‘slowdown in the trend’

The latest Sustainable Fund Flows report revealed that net inflows declined across the board in the second quarter, down 24% to $139.2bn globally from an all-time high of $184bn in the first quarter, although flows into sustainable funds remained well above 2020 levels.

Morningstar said that Europe accounted for more than 81% of these flows but that it “remains by far the most developed and diverse ESG market”, while the US accounted for 13%, having registered a “more moderate decline” in sustainable net flows of 18% over the period.

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Flows for Canada, Australia and New Zealand, Japan and Asia combined were $9.2bn.

Morningstar attributed the one-third decrease to “plummeting inflows” in Asia ex-Japan, which declined by more than 58% over the three months through June 2021.

But it reported that an increase in the number of sustainable products globally, as well as market appreciation and positive inflows continued to drive global sustainable fund assets upward, to $2.25trn in the second quarter, up 12% from the end of the first quarter.

Hortense Bioy, global director of sustainability research at Morningstar, said that the lower inflows into ESG funds “shouldn’t be interpreted as a slowdown in the trend” towards sustainable investments.

“The European ESG space is going through a profound transition. As the EU Action Plan on Sustainable Finance seeks to re-orient capital flows towards sustainable activities, SFDR is creating new disclosure standards to increase transparency,” she said.

“Against this backdrop, asset managers are redesigning their offerings to not only meet the growing demand for ESG investments, but also contribute to a greener future.”

In terms of product development, 177 new sustainable products launched globally, while asset managers also continued to repurpose and rebrand conventional products into sustainable offerings, Morningstar said.

It also published an update on the European sustainable funds universe, following the introduction of the Sustainable Finance Disclosure Regulation (SFDR) Article 8 and 9 classification in March this year.

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According to the report, SFDR: Four Months After Its Introduction, Article 8 and 9 funds account for 30.3% and 3.7% respectively of reviewed fund assets and amount to €3trn in total.

“From just over a third today, we predict that Article 8 and 9 funds could reach 50% of overall EU fund assets within the next 12 months. Many managers are already reporting a higher proportion of Article 8 and 9 fund assets, while others have unveiled plans to augment their Article 8 and 9 product offerings in the coming months,” added Bioy.

The report revealed that active management dominates the post-SFDR ESG fund landscape, with passive funds account for just 11% and 10% of assets in Article 8 and 9 funds respectively.

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