November 7, 2022

Monday Morning Memo: European ESG Fund Market Report: Year-to-Date Q3 2022

by Detlef Glow.

It was not surprising that the year 2022 so far has been in general a negative period for the European fund industry given the geopolitical situation in Europe, the still ongoing COVID-19 pandemic, disrupted delivery chains, rising inflation, increasing interest rates, and the resulting sluggish market environment. Within this market environment and given the economic uncertainties, one would expect that European investors sold long-term funds and bought money market products. Therefore, it is somewhat surprising that European investors sold money market products, which are normally considered safe-haven investments.

Note: As this report also covers markets outside the EU, such as the UK and Switzerland, a high number of funds with an ESG-related investment objective are not covered by the Sustainable Finance Disclosure Regulation (SFDR) and have therefore no assignment to the respective articles. These funds are categorized as unclassified within this report.

This report mainly covers the trends within the segment of ESG-related mutual funds and ETFs. If you would like to get an overview of the general trends in the European fund industry, please click here to read our year to date European fund market review Q3 2022.

We have added data for the assets under management, as well as for estimated fund flows from mutual funds and ETFs, which do not follow an ESG-related investment approach at all labelled as “conventional” for reference.

Assets Under Management

Given the current market environment, it is no surprise that assets under management in the European fund industry declined over the course of the year 2022 from €15.3 tr at the end of December 2021 to €13.0 tr at the end of September 2022. The negative performance of the underlying markets contributed negative €1.9 tr to the decline, while estimated net flows summed up to negative €332.6 bn as of September 30, 2022.

Equity funds (€5.3 tr) held the majority of assets, followed by bond funds (€3.0 tr), mixed-assets funds (€2.3 tr), money market products (€1.4 tr), alternative UCITS funds (€0.6 tr), real estate funds (€0.3 tr), “other” funds (€0.1 tr), and commodities funds (€0.1 tr).

In more detail, €3.0 tr of the assets in equity funds were held by ESG-related funds, while €1.5 tr of the assets in bond funds were held by ESG-related funds. These two classifications were followed by mixed-assets funds, for which €1.0 tr were held by ESG-related funds. Within money market products, €0.7 tr were held by ESG-related funds. In the segment of alternative UCITS funds, €0.1 tr were held by ESG-related funds and €0.1 tr were invested in ESG-related real estate funds. Unsurprisingly “other” funds (€0.01 tr) and commodities funds (€0.006 tr) held only a very limited amount of their assets in ESG-related products.

Graph 1: Assets Under Management in the European Fund Industry by Asset Type – September 30, 2022

European ESG Fund Flows - Q3 2022

Source: Refinitiv Lipper

This means €6.4 tr, or 49.30%, of the overall assets under management were held by ESG-related funds, while €6.6 tr, or 50.70%, of the overall assets under management were held by conventional funds.

Looking at these numbers, one needs to bear in mind that a high percentage of the ESG-related assets under management is a result of the relabelling of existing products and is not related to inflows in the respective products.

Graph 2: Market Share by Assets Under Management – September 30, 2022

Source: Refinitiv Lipper

ESG-related mutual funds and ETFs which are aligned to article 6 of the Sustainable Finance Disclosure Regulation (SFDR) held €0.2 tr, while products which are aligned to article 8 held €5.0 tr, and mutual funds and ETFs which aligned to article 9 held €0.5 tr. Unclassified ESG-related products held €0.7 tr.

In other words, 78.32% of the assets under management in ESG-related products are invested in products classified by article 8 of the SFDR, while 810.43% are unclassified, 8.29% are classified by article 9, and 2.96% are classified by article 6.

Graph 3: Market Share of Assets Under Management of ESG-related Products by SFDR Classification – September 30, 2022

European ESG Fund Flows - Q3 2022

Source: Refinitiv Lipper

As for the active versus passive discussion, it is not surprising that actively managed funds held the majority of assets under management in ESG-related products in the European fund industry. This is because sustainable investment strategies are seen as a natural habitat for active managers by European investors. In more detail, the assets under management of actively managed ESG-related funds account for €5.7 tr, while ESG-related index-tracking funds held €0.5 tr in assets under management and ETFs €0.2 tr.

Graph 4: Market Share of Active Managed Mutual Funds, Index-Trackers and ETFs by Assets Under Management – September 30, 2022

Source: Refinitiv Lipper

While ESG-related index-tracking funds have somewhat the same market share of the ESG-related assets under management as for the overall assets under management, the market share of ESG-related ETFs is significantly lower than the market share for the overall assets under management.

Fund Flows in the European Fund Industry

Given the current market environment, it is not surprising that the European fund industry witnessed overall outflows over the course of the first nine month of 2022 (-€332.6 bn). Nevertheless, it was surprising that the outflows were driven by money market funds (-€151.6 bn), while long-term products faced overall outflows of €181.0 bn.

Generally speaking, the overall flow pattern looked somewhat different for ESG-related products and their conventional peers, since conventional long-term funds (-€181.4 bn) faced outflows, while long-term ESG-related products (+€0.3 bn) enjoyed shy inflows. As for money market products, the flow pattern of conventional (-€58.5 bn) and ESG-related money market funds (-€93.1 bn) was similar, as both categories faced outflows.

Graph 5: Estimated Net Sales by Product Type and Approach, January 1 – September 30, 2022 (Euro Billions)

Source: Refinitiv Lipper

Taking a closer look, mixed-assets funds (+€24.8 bn – conventional funds [-€2.0 bn], ESG-related funds [+€26.8 bn]) were the asset type with the highest estimated net inflows overall for the year 2022 so far. It is followed by real estate funds (+€10.1 bn – conventional funds [+€1.3 bn], ESG-related funds [+€8.8 bn]). Meanwhile, ”other” funds (-€3.1 bn – conventional funds [-€3.5 bn], ESG-related funds [+€0.5 bn]), commodities funds (-€6.2 bn – conventional funds [-€0698bn], ESG-related funds [+€0.6 bn]), alternative UCITS funds (-€22.7 bn – conventional funds [-€23.8 bn], ESG-related funds [+€1.2 bn]), equity funds (-€59.0 bn – conventional funds [-€80.9 bn], ESG-related funds [+€21.9 bn]), bond funds (-€125.0 bn – conventional funds [-€65.6 bn], ESG-related funds [-€59.4 bn]), and money market funds (-€151.6 bn – conventional funds [-€58.5 bn], ESG-related funds [-€93.1 bn]) faced outflows for the first nine months of 2022.

Graph 6: Estimated Net Sales by Asset and Product Type, January 1 – September 30, 2022 (Euro Billions)

European ESG Fund Flows - Q3 2022

Source: Refinitiv Lipper

A closer look at the estimated net flows in ESG-related products by SFDR classifications shows that ESG-related mutual funds and ETFs which are not classified by SFDR enjoyed the highest inflows (+€52.2 bn) for the first nine months of 2022. It is followed by mutual funds and ETFs classified as article 9 products (+€32.8 bn), while mutual funds and ETFs classified as article 6 products (-€4.8 bn), and article 8 products (-€173.1 bn) faced outflows.

At first glance, these flows seem to be counterintuitive, but since this report does also cover countries outside the European Union such as Switzerland and the UK, one should not be surprised by these numbers—especially as Switzerland was the fund domicile with the highest overall inflows for the first nine months of 2022.

The current discussion around “greenwashing” and the missing clear standards for the categorization of funds by the respective SFDR article might be reasons why the European fund industry witnessed outflows from article 8 products since these products are somewhat in-between products as they support ESG criteria, but do not have a formalized ESG-driven investment approach.

Graph 7: Estimated Net Sales by SFDR Classification, January 1 – September 30, 2022 (Euro Billions)

Source: Refinitiv Lipper

Even as ESG-related investment strategies are seen as a natural habitat for active managers, European investors did prefer passive products over the course of the first nine months of 2022. ETFs (+€36.8 bn) were followed by index-tracking mutual funds (+€23.3 bn), the best-selling product type for ESG-related products. On the other hand, actively managed ESG-related mutual funds (-€152.9 bn) faced outflows.

Graph 8: Estimated Net Flows by Product Type (January 1 – September 30, 2022)

European ESG Fund Flows - Q3 2022

Source: Refinitiv Lipper

 

Discover more about Refinitiv Lipper’s sustainable investing data and how to dig deeper www.refinitiv.com/en/asset-management-solutions/lipper-fund-performance#t-esg-scores

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

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