The net assets of sustainable equity undertakings for collective investment in transferable securities (Ucits) more than doubled between 2019 and 2023, rising from €593bn to €1.28trn, the European Fund and Asset Management Association reported in a report on Tuesday 24 September 2024. Efama noted that by 2023, these funds represented 24% of total Ucits net assets, compared to just 15% in 2019. The highest net inflows into sustainable equity Ucits occurred in 2021, when €230bn was recorded. However, inflows slowed significantly in subsequent years due to adverse market conditions. In 2022, inflows dropped to €69bn, and by 2023, they had declined further to €30bn. Despite this cooling demand, Efama pointed out that the market remained resilient compared to the United States, where sustainable equity funds experienced net outflows of €13.7bn in 2023.
The reduction in inflows during 2023 was attributed to macroeconomic uncertainty, including persistently high inflation, rising interest rates and fears of recession, which led investors to shift their focus towards government bonds rather than sustainable equity investments.
Active versus passive management
Efama highlighted in the report the increasing importance of passive sustainable equity Ucits, which experienced positive inflows in 2023, while actively managed sustainable equity funds faced outflows. By the end of 2023, 63% of sustainable equity Ucits--amounting to €804bn--were actively managed, with the remaining 37%, or €472bn, being passively managed. Passive investment strategies have gained traction in recent years, partly due to the rising popularity of exchange-traded funds (ETFs), which represented nearly 20% of total sustainable equity Ucits, corresponding to €255bn in assets under management.
Sustainable equity Ucits primarily focused their investments on large-cap companies, employing either a growth strategy that targets high-growth potential or a core strategy that emphasises stability and lower risk.
SFDR classification
The report also examined the classification of sustainable equity Ucits under the Sustainable Finance Disclosure Regulation (SFDR). It found that 18% of sustainable equity Ucits were classified as article 9 funds, while 70% fell under article 8. Article 9 funds have a sustainable investment objective, whereas article 8 funds promote environmental and/or social characteristics.
Efama noted that many investments aimed at sustainability were still in a transitional phase, making it challenging for asset managers to classify them as article 9 (which have stricter criteria) due to concerns over greenwashing allegations and the ongoing regulatory uncertainty surrounding the SFDR definitions. Consequently, many asset managers preferred to classify their funds under article 8 until further clarity is provided in future SFDR reviews.
Interestingly, 12% of sustainable equity Ucits were not classified under article 8 or 9 but still ranked highly on Morningstar’s sustainability ratings. Despite this, only 67% of sustainable equity Ucits received a “high” or “above average” sustainability rating, while 33% were rated “average” or below. This discrepancy underscored the need for greater transparency and consistency between SFDR classifications and ESG ratings.
Performance and returns
Over the past five years, sustainable equity Ucits delivered strong financial returns. On average, these funds generated positive net performances (net of costs), even in the face of high inflation. The only year of negative average performance was 2022, when global markets were affected by the Russian invasion of Ukraine. However, the market quickly rebounded in 2023, with sustainable equity Ucits recording a net return of 14.5%.
Efama’s analysis showed that sustainable equity Ucits performed comparably to non-sustainable equity Ucits. The report concluded that investors did not need to sacrifice financial returns in order to choose sustainable investment products. Both sustainable and non-sustainable equity funds displayed similar patterns of performance over the past five years, with individual fund characteristics playing a larger role than the distinction between sustainable and non-sustainable products.
Efama noted that sustainable equity Ucits were generally more cost-effective than non-sustainable equity funds. This trend was partly driven by increasing competition among fund managers, who offered lower fees to attract new investors, especially in newly launched ESG funds. As a result, investors with a preference for sustainability could allocate their savings to these funds without incurring additional costs.
Furthermore, the industry as a whole has seen a downward trend in fund fees over the past five years, benefiting both sustainable and non-sustainable investors. Vera Jotanovic, senior economist at Efama and author of the report, stated that sustainable equity Ucits encompass a wide range of sustainability themes, offering resilience and competitive returns. Anyve Arakelijan, policy advisor at Efama, added that as the regulatory landscape evolves, the sustainable finance framework is expected to become more investor-focused, resolving inconsistencies with other EU regulations and advancing progress towards the EU’s long-term sustainability goals.