Despite the political turbulence around ESG in North America, Europe remains a global leader in sustainable investment funds, holding 85% of the global EUR 2.6 trillion in sustainable net assets, according to a report from the Association of the Luxembourg Fund Industry (ALFI).
The European Sustainable Investment Funds Study, produced in partnership with Morningstar and Tameo, found that the net assets of sustainable funds in Europe totalled €2.2 trillion (US$2.3 trillion) at the end of 2023, and represent 19% of the European investment fund market, a significant increase from just 6% in 2019.
Sustainable funds – those incorporating ESG (environmental, social governance) factors into their investment strategies or aiming to generate positive social/environmental impact alongside financial returns – saw a 20.2% growth in 2023, outperforming conventional funds which grew by 16.9% in Europe.
The resilience of sustainable funds is evident – net inflows into sustainable funds totalled €77 billion in 2023, compared to net outflows of €14 billion from conventional funds. This reinforces Europe’s position as a leader in sustainable investing, making it a key area of interest for faith-based asset owners looking to invest in this space.
'Europe continues to lead the global sustainable investment fund market, driven by a robust regulatory framework, including the SFDR, and strong investor demand,' said Britta Borneff, Chief Marketing Officer at ALFI.
'The study highlights both the growth and resilience of Europe’s sustainable investment funds. We hope these insights support decision-making, drive progress in sustainable finance, and help build a more sustainable and equitable future.'
Key trends
Passive strategies continue to gain momentum: Demand for passive strategies in European sustainable funds continued to rise in 2023, with their market share growing from 21% of net assets in 2021 to 29% by the end of 2023. Passive strategies also saw a growth rate of 38.8%, significantly outpacing the 14% growth of active strategies, a trend also observed in conventional funds.
Impact funds remain niche – Impact funds accounted for only 18% of the net assets in sustainable investment funds by the end of 2023, down from 27% in 2021.
Article 8 funds dominate: 58% of funds are classified as Article 8 funds while 4% are Article 9 (see below for definitions).
Sustainable ETFs gain slightly larger market share than conventional funds: For the first time, sustainable funds have a greater market share of ETFs than conventional funds – 15% versus 14%.
Regulatory framework
Europe’s leadership position is aided by its Sustainable Finance Disclosure Regulation which ensures rigorous classification of ESG funds. The US, by contrast, lacks a comprehensive federal framework regulating ESG, instead relying on a patchwork of industry-specific federal and state laws.
Meanwhile, faith-based organisations are increasingly mobilising to advocate for renewable energy investments and environmental justice initiatives. As highlighted in The Angry Army, there is a growing movement among US faith groups to actively engage in climate-related efforts, positioning faith communities as key advocates for responsible investing despite the broader ESG backlash.
Click below to read the full report.
Definitions
Article 8 funds: Defined by the Sustainable Finance Disclosure Regulation (SFDR) as promoting environmental or social characteristics
Article 9 funds: Defined by the SFDR as aiming to achieve sustainable goals that benefit society and the environment.