Global ESG funds raised $10.4 billion in Q3 2024

The global reach of environmental, social and governance open-end and exchange-traded funds attracted approximately US$10.4 billion in net new money in the third quarter of 2024, a notable increase from inflows of US$6.3 billion in the second quarter and US$4.8 billion in the first quarter. In Europe, flows into sustainable bond funds have outpaced flows into conventional bond funds. The organic growth rate of global ESG fund coverage increased to 0.33% from a revised 0.20% three months ago. But that was far lower than the 0.77% rise seen across the broader fund, which saw combined inflows of US$373 billion, helped by an improving economic outlook and higher market prices. Organic growth rates, calculated as net flows for the period divided by total assets at the beginning of the period, provide an indication of the relative size of net flows.

Higher global inflows into ESG funds were driven primarily by slowing outflows from the US, Japan and Canada, while Europe saw slightly lower subscriptions in the third quarter compared to the previous quarter.

Meanwhile, global ESG fund assets rose to $3.3 trillion from $3.1 trillion in the previous quarter. This cumulative growth was roughly in line with market dynamics. Both the Morningstar Global Market Index and the Morningstar Global Core Bond Index rose 6.6% and nearly 6.9%, respectively.

Europe

The European continent earned nearly $10.3 billion in the third quarter, up from a restated $11.1 billion in the second quarter. Europe is the world’s largest ESG stock market with 84% of assets.

This 0.40% flow slowdown contrasts with a 0.67% increase in organic growth for traditional coverage funds, which have collected more than $122 billion over the past three months.

In the first nine months of the year, European ESG funds raised just US$37 billion, half the subscriptions recorded in the same period last year.

Meanwhile, Article 8 funds, the light green category of funds under the EU Sustainable Finance Disclosure Regulation, raised €38 billion of new money, the highest inflow recorded since the end of 2022. Article 8 funds make up about 56% of the total fund. assets in the EU.

The SFDR classifies all funds in the EU under Articles 6, 8 and 9, describing different levels of sustainability. Article 8 funds promote environmental and/or social performance, while Article 9 funds have a sustainable investment goal. Funds under the SFDR that do not fall under either Article 8 or Article 9 are Article 6 funds.

Redemptions from Article 9 funds continued for the fourth quarter in a row as investors withdrew €2.2 billion from these strategies. Moreover, Article 8 coverage’s organic growth rate of 0.7% contrasts with the 2.4% rate for Article 6 funds.

In Europe, flows into ESG bond funds outpace conventional funds

Article 8 bond funds raised almost 45 billion euros in the third quarter, outpacing their Article 6 equivalents, which raised 39 billion euros. Fixed income was the only asset class to show a marked recovery in inflows during the final three quarters of the year for both Article 8 and Article 9 funds as investors rushed to lock in attractive yields that provide strong downside protection from price movements.

With bond market prices now in line with expectations of modest rate cuts and inflation posing less of a risk, the bond market offers a better trade-off between carry and potential yield volatility, keeping it a potentially favorable investment environment.

In contrast, flows into Article 8 and Article 9 equity strategies continued to perform poorly compared to Article 6 equity products. While net inflows into Article 8 equity funds increased to €2 billion, payouts from Article 8 equity funds 9 continued into the third quarter after a loss of almost 2.7 billion euros.

The Fund’s Article 8 and Article 9 assets rose to a record €6 trillion

The combined assets of Article 8 and Article 9 funds remained quasi-constant at €6 trillion at the end of September, maintaining their market share at almost 61% of EU coverage.

Launch and closure of the European ESG Fund

The third quarter of 2024 saw the smallest number of new ESG fund launches in recent years in Europe: 43 of the restated 70 funds launched in the previous quarter and of the 76 launched in the third quarter of last year. As we continue to analyze the data and identify additional launches, we expect this number to be adjusted upward in the next report.

The somewhat slower product development observed over the last few quarters is not limited to Article 8 and 9 funds. A smaller number of Article 6 funds have also been launched, due in part to general market sentiment weakened by an uncertain macroeconomic environment, including high inflation and interest rates. In the third quarter of 2024, newly launched Article 8 and 9 funds accounted for 56% of the total number of funds launched in the EU, slightly higher than in the first quarter of 2024.

Rebranding of the European ESG Fund

In addition to fund launches, closures and reclassifications, the landscape of Article 8 and Article 9 products has also been shaped by rebranding, as evidenced by the changed fund names. Asset managers have added, deleted and changed the names of existing funds to reflect changes in investment objectives and/or portfolios. The active activity of Article 8 funds adding key ESG terms to their names observed in 2022 has declined since mid-2023, giving way to a new trend of funds moving away from key ESG terms that has become more pronounced since the fourth quarter of 2023.

In the year to September, 91 Article 8 funds changed names, of which 39 added key ESG terms, 40 deleted key ESG terms and 12 replaced key ESG terms. In the third quarter alone, 10 Article 8 funds removed ESG-related terms from their names, 11 added them, and one swapped them. The first included Fidelity Funds Emerging Markets Ex China Fund, Ninety One Global Macro Allocation, And Neuberger Berman Global Value Fund, from which the term “sustainable” was removed. We expect these numbers to be adjusted upward as recent name changes are reflected in our database.

Meanwhile, eight Article 9 funds replaced one ESG-related term with another in 2024, compared with 14 for all of 2023.

We expect rebranding activity among Article 8 and Article 9 funds to accelerate over the next six months as asset managers’ products marketed in the EU must comply with the European Securities and Markets Authority’s guidelines on ESG fund names. They have until May 2025 to do this. The guidelines aim to protect investors from the risk of greenwashing and provide minimum standards for funds available for sale in the EU that use certain ESG terms in their title. Last May we has identified around 4,300 EU funds that have ESG or sustainability terms in their names. this may be subject to guidelines.

We expect more funds to abandon the most popular terms “ESG” and “sustainability” in favor of other ESG-related terms or neutral terms not related to ESG or sustainability. This will happen because portfolio managers may be unwilling or unable to meet the strict criteria set by the EU regulator. Among the several hundred additional funds that move away from ESG-related terms, we expect that many will stop promoting their ESG characteristics through their names. For example, “ESG Verified,” “ESG Filtered,” and “ESG Leaders” will become “Verified,” “Filtered,” and “Leaders,” respectively. This may make it more difficult for investors to find funds with ESG characteristics.

We expect an increase in the popularity of key ESG-related terms that highlight transitional aspects. This shift will be driven by a growing number of investors looking to align their portfolios with the evolving real world. Examples of funds that have changed key ESG terms include: New Robeco Transition loans (formerly known as Robeco Sustainable Growth Loans), Transition to pictet-clean energy (formerly known as Pictet-Clean Energy), Cardano ESG Transition Enhanced Index Equity Global (formerly known as ACTIAM Equity World Sustainable Index Fund), And Trium ESG emission improvers (formerly known as Trium ESG Impact on Emissions).

To read the full report on Global ESG Fund Flows: Third Quarter 2024 Review, click Here

To read the full SFDR Article 8 and Article 9 Funds: Third Quarter 2024 Review, click Here