Macroeconomic pressures such as rising interest rates and inflation continued to affect investor sentiment, found the . In Europe, there were fewer launches of sustainable funds thanks to regulatory uncertainty and fears of greenwashing. Despite this decrease in inflows, the report found that global sustainable fund assets reached $2.74trn at the end of March 2023, up from $2.55trn the previous quarter.
“The first quarter was a continuation of what we saw in 2022. ESG funds are not immune to the challenging macro environment, as reflected by their lower inflows compared with a few quarters ago,” said Hortense Bioy, global director of sustainability at Morningstar. “But ESG funds are still growing faster than the broader fund market, supported by increased ESG regulation at both company- and fund-level.”
Here are some key takeaways from the report.
$32.3bn of inflows in Europe in Q1
Although sustainable funds in the US saw their third quarter of outflows in a year ($5.2bn), European funds saw inflows of $32.3bn in the first quarter of 2023. This decrease in the US is mainly due to a single fund-- iShares ESG Aware MSCI USA ETF--which saw $6.5bn in outflows during Q1, noted the report.
Europe has the “lion’s share of the sustainable fund landscape,” said Morningstar, with 84% of total assets and 77% of global sustainable funds. However, net flows into European sustainable funds declined from Q4 2022, when $40.3bn of new money came in.
Only 53 sustainable fund launches in Europe in Q1
Even though Europe has most of the world’s sustainable assets and funds, the first quarter of the year has seen a 66% decrease in sustainable fund launches in Europe--only 53 were launched in Q1, compared to 155 in the fourth quarter of 2022. Morningstar noted that “this number will likely be higher in our next report as we identify more launches and additional ones are reported.”
On the other hand, in the US, the number of sustainable fund launches increased from 17 in the last quarter of 2022 to 26 in the first quarter of this year.
The slowdown in European fund launches comes amidst regulatory uncertainty, such as the classification criteria for article 8 vs. article 9 funds, and fears of greenwashing accusations. Morningstar reported at the beginning of the year that .
Sustainable fund assets inch higher
Despite lower inflows, assets in European sustainable funds continued to rise, reaching $2.3trn at the end of the first quarter of 2023. That’s an increase of 8.2% from Q4 of last year, compared to an increase of 3% in the overall European fund universe, said the report. Sustainable funds in Europe now occupy 22% of the market, up from 18%.
Morningstar said it expects to see sustainable funds continue to gain ground as investor demand for sustainability strategies grows.
Inflows into sustainable funds represented 43% of flows
In Q1 2023, European conventional funds saw inflows of $37.8bn. This means that sustainable fund inflows ($32.3bn) made up 43% of fund flows in Europe in the first three months of the year.
Sustainable equity funds remained the most popular type of asset class ($20.9bn), bringing in almost twice as much as the net subscriptions in conventional funds, noted the Morningstar report. But sustainable bonds only brought in $12.6bn in Q1 2023, compared to $19.2bn in the fourth quarter of 2022.
Find the full Morningstar report .