First six months of 2019 saw record €36.9bn transferred into sustainable funds in Europe, according to research by Morningstar
Sustainable investment funds are becoming increasingly popular among investors, according to new research from analyst house Morningstar that suggests sustainable funds pulled in record levels of investor cash in the first six months of 2019.
In the first half of 2019 €36.9 billion flowed into sustainable classified funds, more than any previous six-month period and approaching the 2018 full-year figure of €38 billion. The surge in new investment helped assets hit a record level of €595bn, according to Morningstar.
If net flows continue at their current rate the full-year figure for 2019 could smash the 2017 record of just under €60bn, it said.
The research also suggests the growing levels of investor interest are built on solid foundations given sustainable badged funds are performing better than their traditional counterparts. Almost two-thirds of the European sustainable funds assessed by Morningstar beat the average performance for the wider market in the last 12 months, while around 34 per cent finished in the top quartile of their respective categories.
“These numbers are consistent with evidence from academic research that suggests no systematic performance penalty associated with sustainable investing and possible avenues for outperformance based on reduced risk or added alpha,” Morningstar reported.
However, the US-headquartered financial research firm said the line between specialised Environmental, Social and Governance (ESG) funds and their mainstream counterparts is becoming increasingly blurred, as traditional funds take steps to strengthen their sustainable investment criteria.
Confusion amongst some investors over which funds should qualify as sustainable is being further compounded by the lack of standard language used to describe funds, noted Hortense Bioy, director of passive strategies and sustainability research for Morningstar Europe.
“This report underscores the challenge of identifying and categorising sustainable funds,” she said. “Fund names cannot be relied upon in determining whether the underlying strategies incorporate ESG criteria and, if they do, to what extent. Some funds with key terms like ‘ESG’ or ‘sustainable’ in their names don’t seem so different from the growing cohort of traditional funds that are now formally considering sustainability issues as part of their investment process, engaging with companies, and screening out the least ESG-compliant companies.
“Thus, the line between traditional and sustainable investments is becoming blurrier by the day.”
The EU is working on a taxonomy to define “sustainable” investments, which aims to offer investors and companies a classification system to identify economic activities that are environmentally sustainable, and to help them measure their investments’ real world impact.
It hopes that imposing consistency on the market will formalise the expanding green finance market and give investors and companies more confidence in financial arrangements marketed as “green”. However, some critics have countered that the proposals risk inadvertently locking the sustainable investment sector outside of the financial products mainstream.