Despite challenging circumstances, European sustainable funds attracted $20bn in net flows in Q2 2023, a sharp decline from nearly $34bn in the first quarter, as stated in Morningstar’s latest report on sustainable fund flows. Photo: Shutterstock

Despite challenging circumstances, European sustainable funds attracted $20bn in net flows in Q2 2023, a sharp decline from nearly $34bn in the first quarter, as stated in Morningstar’s latest report on sustainable fund flows. Photo: Shutterstock

Net flows into Luxembourg and European sustainable investment funds slowed significantly in the April to June 2023 period, according to figures provided to Delano by Morningstar Direct this week.

Luxembourg-domiciled sustainable funds experienced their weakest quarter since 2020, with active funds facing net outflows of $3.1bn in the second quarter of 2023. These outflows were, however, partially mitigated by an inflow of $3.76bn into passively managed funds, according to data from Morningstar Direct.This Luxembourg data is part of the global sustainable fund flows , published by the research firm Morningstar on Wednesday 26 July 2023.

Despite the previous perky three quarters, the Q2 2023 marked a significant dip in net new investment into Luxembourg-based sustainable funds. This plummeted to a meagre $0.57bn, down from $11.09bn in the first quarter--a nearly twenty-fold drop.

However, when considering the past four quarters collectively, passive strategies somewhat offset the downturn. These strategies contributed to a significant inflow of $17.3bn into passive funds, compared $6.88bn in net new capital raised in active funds.

On a broader European scale, the organic growth rates--calculated by comparing net flows to total assets at the start of a period--saw a decline to 0.9% in the second quarter, down from 1.6% in the previous quarter.

Nevertheless, this outperformed the overall European fund market, which registered a marginal organic decline of less than 0.01% following a modest growth of 0.74% in the first quarter.

Macro outlook

Morningstar attributed this downturn to nearly $19bn being withdrawn from conventional funds amid an uncertain macroeconomic outlook marked by high inflation and anticipated interest rate hikes.

In Q2 2023, the Netherlands-domiciled Goldman Sachs Enhanced Index Sustainable Global Equity Fund I NL topped the inflow charts with $3.5bn. This spike was largely attributed to one client’s switch from two other similar funds, the Morningstar report noted.

Launches

The report also noted a subdued introduction of new products, with a record low of just 57 sustainable funds being launched in Europe in Q2 2023.

Morningstar interpreted this trend as a reflection of the overall dampened market sentiment, influenced by a challenging macroeconomic landscape. This interpretation was further substantiated by the low count of newly launched conventional strategy funds.

Hortense Bioy, global director of sustainability research at Morningstar, commented, “In Europe, environmental, social, and governance funds attracted net new money despite a slowdown in product development, greenwashing concerns and the ever-evolving regulatory environment. ESG funds continued to hold up better than the rest of the market, which saw net outflows.”

Despite headwinds, higher valuations led to global sustainable fund assets nearing $2.8trn by the end of June, while Europe maintained its dominant position in the sustainable fund landscape, accounting for 84% of global sustainable fund assets.

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