Green Bond Funds Attract Sustainable Flows

The
Article
8
and
Article
9
fund
universe
encompasses
open-end
and
exchange-traded
funds. Money
market
funds,
funds
of
funds,
and
feeder
funds
are
excluded.
Funds
with
no
ESG
characteristics
are
classified
as
Article
6,
“not
stated”
in
Morningstar
Direct.

The
overall
postive
sentiment
in
the
sustainable
investment
space
was
mirrored
by
the
wider
European
fund
landscape.
In
total,
Europe-domiciled
funds
gathered
€67.1
billion
in
the
first
four
month
of
the
year,
with
each
month
showing
positive
net
inflows.  

Flows
by
EU
SFDR
Fund
Type:
1
Year

Source:
Morningstar
Direct.
Data
as
of
June
12,
2024. 

Fixed-Income
Funds
See
Positive
Net
Flows 

Article
8
fixed
income
funds
garnered
€60.42
billion
between
January
and
April,
and
Article
9
bond
funds
€4.22
billion.
This
compares
to
net
inflows
of
€9
billion
into
Article
6
funds. 

“The
higher
inflows
into
Article
8
bond
funds
relative
to
Article
6
bond
funds
may
reflect
investor
expectations
that
the
‘higher
for
longer’
interest-rate
environment
may
favor
investment-grade-type
of
bonds,
which
tend
to
make
up
ESG-oriented
portfolios”,
says
Hortense
Bioy,
global
head
of
sustainability
research
at
Morningstar. 

In
January,
financial
markets
had
priced
in
that
the
European
Central
Bank
will
cut
key
interest
rates
five
times
in
2024,
with
a
first
cut
in
the
spring.
Now,
expectation
centrer
around
one
or
two
more
cuts
this
year,
after
the
rate
cut

earlier
this
month.
The
ECB
also
raised
its
inflation
outlook,
which
dampened
hopes
of
monetary
easing.

As
for
Article
9
funds,
the
positive
flows
into
the
fixed-income
class,
totaling
€4.22
billion,
were
offset
by the
significant
redemptions
from
other
asset
classes,
most
notably
the
record-high
of
over
€10
billion from
equity
funds.

Article
8
Equity
Funds
Bleed
Money

“Light
green”
equity
funds
also
continued
to
encounter
outflows,
registering net
flows
of
negative
€19.52
billion
in
the
first
four
months
of
the
year.
This
category
has
experienced
monthly
net
redemptions
since
April
2023.
Year-to-date,
European
Large
Caps
were
the
category
that
saw
the
biggest
outflows.
In
contrast,
net
inflows
into
Article
6
equity
funds
totalled €41.77
billion. 

“It
is
fair
to
assume
that
some
investors
took
a
more
cautious
approach
to
ESG
investing
last
year
in
the
wake
of
2022′s
underperformance
of
ESG
and
ESG
strategies
that
was
partly
due
to
their
typical
underweighting
in
traditional
energy
companies
and
overweighting
in
technology
and
other
growth
sectors”,
Morningstar’s
Bioy
wrote
in
the
January
2024
report

SFDR
Article
8
and
Article
9
Funds:
Q4
in
Review. 

Many
sustainable
funds
take
a
cautious
approach
to
fossil
fuel
investments,
and
in
addition
Russia’s
invasion
of
Ukraine
has
pushed
defence
stocks
higher.
This
is
reflected
in
indexes
that
capture
these
markets:
the Morningstar
Europe
Sustainability
Index shed
16.79%
in
2022,
while
losses
of
the
wider

Morningstar
Europe
GR
Index
were
limited
to
11.11%
(in
euros).

Looking
at
the
two
Morningstar
Indexes,
2024
starts
to
paint
a
different
picture
from
a
performance
perspective:
the
Morningstar
Europe
Sustainability
Index
is
up
by
10.87%
year-to-date
(in
euros),
while
the
broader
market
slightly
lags
at
+10.58%.

Bioy
also
noted
that
additional
factors
weighing
on
investor
demand
for
ESG
funds
included
greenwashing
concerns
and
the
ever-evolving
regulatory
environment.
The
wave
of
fund
reclassifications
to
Article
8
from
9
under
the
Sustainable
Finance
Disclosure
Regulation
in
late
2022,
and
other
issues
related
to
the
implementation
of
the
regulation,
have
caused
confusion
among
investors
and
other
market
participants,
she
said. 

Sustainable
ETFs
Gain
Market
Share 

Like
in
the
wider
market,
passive
strategies
continue
to
gain
market
share
in
the
SFDR
landscape.
Passive
strategies
garnered
€13.14
billion
in
the
year
to
date,
with
total
assets
of
Article
8
and
9
passive
funds
reaching
€683
billion
at
the
end
of
April. 

The
much
bigger
active
SFDR
universe
(assets
stood
at
€4,761
billion
as
of
April
30
2024)
also
saw
positive
net
inflows
into
Article
8
funds
(€1.7
billion
year-to-date).
Actively
managed
Article
9
funds,
on
the
other
hand,
saw
€7.78
billion
walk
out
the
door
between
January
and
April.

From
an
organic
growth
perspective,
Article
8
funds
showed
a
negative
0.08%
organic
growth
rate
at
the
end
of
April
for
the
previous
12
months.
On
the
other
hand,
products
falling
in
the
Article
9
group
saw
a
more
negative
0.88%
organic
growth rate.
Meanwhile,
funds
not
considered
to
be
Article
8
or
Article
9
according
to
the SFDR
showed
positive
average
organic
growth
rates.

Morningstar’s
sustainability
experts
publish
quarterly
fund
flow
reports.
The
Q2
2024
SFDR
quarterly
report
is
scheduled
to
be
published
at
the
end
of
July.

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