Monday Morning Memo: Will ESG Funds Continue to Drive the Growth of the European Fund Industry?

Environmental, social and governance (ESG) was one of the major drivers for the growth of the European fund industry over the course of the year 2021. The new EU regulations based on the Action Plan on Financing Sustainable Growth by the EU Commission drove these developments. The plan of market regulators to have all regulations, a taxonomy, and the respective technical standards in place by the end of the year 2021 failed, as the technical standards need to fulfill the reporting duties for the implementation of the EU taxonomy were delayed twice over the course of the year.

The lack of the technical standards leaves investors somewhat in wobbliness, as it is not clear for them if the funds within their portfolio will meet the demand of the new regulation once the technical standards are in place. This is also true for the classification of a fund based on the articles 6, 8, and 9 of the Sustainable Finance Disclosure Regulation (SFDR). With regards to this the growth within ESG products over the course of the year 2021, it might only be the tip of the iceberg since a number of investors might still stand on the sidelines waiting for clarification from regulators.

It is already clear that the integration of ESG factors in the portfolio management process of a fund will be key for the success of the distribution efforts in the retail and wealth management space since a number of distribution platforms and banks decided to distribute only funds which are aligned to article 8 or 9 of the SFDR. This is because they are under pressure to align their product and distribution strategy with the overall ESG strategy of the (parent) company. As an increasing number of corporations and asset owners are rethinking their overall ESG strategy and aligning all their businesses, respectively, it is to be expected that this trend will continue.

In addition, it is already foreseeable that the demand for ESG-related funds and ETFs will further increase as more and more investors will integrate ESG-related products into their portfolios. This forecast explains at least in part why so many funds get repurposed and start to integrate ESG criteria in their respective portfolio management processes. Even the promoters of ETFs have started to repurpose some of their plain vanilla products by changing the underlying index from a conventional index to an ESG-related index.

From my point of view, ESG-related funds will continue the trend of 2021 and will be a key driver of the growth of the European fund industry over the course of 2022 regardless of the general market trends.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.