This year looks set to be a pivotal year for environmental, social, and governance (ESG) investing strategies and products targeting retail investors in Europe, according to the latest issue of The Cerulli Edge—European Monthly Product Trends Edition.
For starters, it is the beginning of the decade in which the European Parliament intends to lead the drive for carbon neutrality. The EU is aiming for a US$100 billion annual budget for climate change projects by 2025, markedly up from 2018’s US$24.3 billion. In addition, several supranational organizations have called for trillions of dollars’ worth of infrastructure investment in the next decade to improve sustainability and cope with changing demographics.
“Listed investment trusts are already proving popular with retail investors, with a number of trusts having raised significant amounts of money in 2019,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli. “At present in the equity space, the strategies available to investors range from broad ESG funds with exclusion policies to thematic funds, impact investing products, and strategies targeting the UN’s Sustainable Development Goals,” he continues.
Global green bond issuance is also increasing as ESG grows beyond the equity markets. Although this fledgling market has to date been mostly closed to retail investors, liquidity is improving due to the increase in supply and Cerulli expects managers to launch more products to cater to a broader audience.
“In addition, with increasing access to a variety of asset classes, product providers have begun launching sustainable versions of multi-asset fund ranges for the retail market,” notes Zumbo.
One of the most significant pieces of European ESG regulation is set to emerge in 2020. The EU’s sustainable finance taxonomy will be a framework for assessing the carbon intensity of holdings, allowing investors to assess where products are in terms of achieving the global aim of zero net carbon emissions by 2050. A company’s taxonomy rating will be based on its economic activity and how it generates revenue.
Separately, the EU is expected to adopt new regulations for index providers to ensure that their ESG benchmark methodologies are appropriate and do not allow for greenwashing. The rules are aimed at improving transparency and the ability to compare information across all benchmarks. Cerulli points out that the plans for the new rules coincide with a spike in the amount of new money flowing into passive ESG products such as exchange-traded funds.
“An increasing number of product providers are seeking to incorporate ESG analysis into their investment research capabilities, based on the growing body of evidence that such screens can improve long-term returns—meaning more products are becoming available for ESG investors,” says Zumbo.
• Bond funds continued to dominate funds sales in Europe in October, registering net inflows of €23.4 billion (US$26 billion). Mixed-asset was the second-best-selling sector, recording net sales of €1.4 billion. All other asset classes suffered net outflows in October, with equity funds hardest hit, losing €2.5 billion.
• The U.K. mutual fund market suffered net outflows of £7.4 billion (US$9.7 billion) in October, in a continuation of the negative trend in the country. The market’s performance during the month was the worst yet in 2019 in terms of net sales.