What's Driving the Rise in ESG Funds?

Video: Morningstar's director of sustainability research Hortense Bioy explains why there has been a big jump in demand for ESG products this year

Holly Black 9 November, 2020 | 2:19PM

 

 

Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Hortense Bioy. She is Director of Sustainability Research at Morningstar.

Hello.

Hortense Bioy: Hi, Holly.

Black: So, you've been doing some number crunching and looking at all of the money flowing into ESG or sustainable funds so far this year and there's a lot of it. What is driving this trend?

Bioy: Yes, Holly. I think it's important to say that we reached a major milestone at the end of last quarter. We reached $1 trillion of assets in European sustainable funds which represents a 10% increase over three months. And I think it's quite impressive given the backdrop of the COVID crisis. So, there are there are three key drivers of that growth.

The first driver isn't a surprise. There is a growing interest and demand for sustainable investment products. In the third quarter, more than €50 billion went into European ESG funds. This represents 40% of the overall European fund flows. Both institutional and retail investors want to invest in more sustainable companies. So, these are companies that have sound and resilient business models, companies that sell products and services that are more aligned with the values that are fit for the future and also companies that treat all the stakeholders well, including their employees and the suppliers which is especially important in this context of the COVID crisis.

The second key driver of the growth of ESG funds over the quarter is the continued stock market recovery. And the third driver is the expansion of the European sustainable fund universe in terms of number of funds.

Black: Yes. So, obviously, with this pickup of interest from investors in ESG, we are seeing a lot more funds being launched in this space. Is that a good thing?

Bioy: So, in the last quarter, we saw more than 100 new sustainable funds come to market which brings the total number of new sustainable offerings in Europe to a new record of over 330 funds. I think it's fair to say that this high level of product development is unprecedented and it is partly driven by the European regulation which aims to (indiscernible) capital towards more sustainable activities and also to align to the EU goal of being a net zero carbon emitter by 2050. So, is it a good thing? Well, it's a good thing as long as there is demand for these products and investors understand what they're buying and that they know also what to expect in terms of outcome. And that's why asset managers need to disclose more information and more data, and this is what the European regulator will soon require them to do.

Black: So, when I look at these funds being launched, it seems to me that a lot of them have a climate focus. Why is that such an important trend?

Bioy: Yeah. So, last quarter, new funds with an environmental theme accounted for more than a quarter of total sustainable fund launches and we saw a variety of funds in that bucket. We saw a handful of low-carbon funds, Paris-aligned funds, but also, I think a couple of two or three newer green bond funds. Now, not all climate-focused funds have the same objective and some, like for example, aim to reduce carbon risk by investing in companies that are more aligned to a low-carbon economy and some others focus on promoting the transition to  low-carbon economy by investing in climate solutions like renewable energy. And also, you have strategies that aim to do both. So, it's important that investors look at – when they look at these funds, they really understand that there is a range of investment propositions out there which will result in very different outcomes.

Black: Hortense, thank you so much for your time. For Morningstar, I'm Holly Black.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk

 

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