European Sustainability Funds Surge to €8 Trillion Under SFDR Article 8 and 9 Rules: MSCI Report
Key Impact Points:
- Sustainability at the Forefront: Sustainability-related funds accounted for EUR 8 trillion out of EUR 14 trillion in European fund assets, with equity and bond funds leading the charge.
- Improved Disclosures: Fund disclosures surged, with 80% of funds considering Principal Adverse Impact (PAI) indicators in their strategies, up from 50% in 2023.
- Regulatory Evolution: New fund-naming guidance from ESMA and the introduction of the Corporate Sustainability Reporting Directive (CSRD) are set to enhance transparency and tackle greenwashing concerns.
Majority of European Fund Assets Are Sustainability-Related
Sustainability-related funds continue to represent the majority of European fund assets, totaling around EUR 8 trillion out of EUR 14 trillion. Equity and bond funds make up more than 80% of these assets, with global equity strategies being particularly popular among SFDR article 8 and 9 funds. Despite their growing presence, article 9 funds remain limited in asset class, region, and sector, presenting an opportunity for differentiation in new fund launches.
Taxonomy-Aligned Capital Expenditure Outpaces Aligned Revenues
More than twice as many European-domiciled funds have over 5% taxonomy-aligned capital expenditure compared to aligned revenues. This points to increasing exposure to green revenues as companies invest in sustainable activities. The taxonomy-eligible revenues far exceed aligned revenues, suggesting that more companies are aligning with sustainable practices, indicating strong momentum for future green investments.
Exchange-traded funds (ETFs) focused on utilities also reported the highest taxonomy alignment, largely driven by renewable energy activities. Interestingly, this includes some article 6 funds, which do not have sustainability objectives, signaling a broader market shift toward sustainability. The European utilities sector, with over 60% of its investment activity already taxonomy-aligned, is poised to play a significant role in transition finance strategies.
Improved Disclosures and Regulatory Impact
In the first half of 2024, article 8 funds saw net inflows of EUR 44 billion, while outflows continued from article 9 funds, primarily in active funds. As of June 30, 2024, assets under management (AUM) for article 8 and 9 funds reached EUR 6.9 trillion and EUR 330 billion, respectively.
Fund disclosures have improved significantly, with the number of funds submitting data via the European ESG Template (EET) tripling compared to 2023. In addition, 80% of funds now consider Principal Adverse Impact (PAI) indicators in their investment strategies, up from 50% in 2023. This shift indicates that future changes to PAIs in SFDR updates could have wide-reaching effects on how EU-based funds align with investor sustainability preferences.
The European Securities and Markets Authority (ESMA) has also tightened fund-naming rules. A quarter of article 9 funds with high fossil fuel exposure that include “green bonds” in their names now face exclusions based on the EU’s Paris-Aligned Benchmark (PAB). Additionally, infrastructure funds will need to adapt their names to avoid divestment impacts under these new guidelines.
Looking Ahead: Regulatory Evolution and Sustainability Alignment
Fund managers will need to navigate these evolving regulations as they define sustainability mandates and construct portfolios. Notably, there are significant differences in PAB alignment across major indexes, with asset class and geographic variations that could influence investment strategies.
The U.K.’s Sustainability Disclosure Requirements (SDR) have similarly shaped the market. Of the 320 U.K.-domiciled funds under SDR rules, only six funds had more than 70% in Sustainable Investments (SI), according to SFDR Article 2(17), indicating room for improvement.
Looking forward, the ongoing European Commission review of the SFDR could take two to three years before implementation, and fund managers are expected to better align with investor preferences and sustainability-led portfolio construction as EU taxonomy disclosures improve.
