Surge in sustainable funds follows new disclosure demands

New European rules that require asset managers to provide ESG disclosure for their investment funds has helped drive a surge in sustainable assets under management, according to a new report from Morningstar.

The firm reported that, in the wake of the Sustainable Finance Disclosure Regulation (SFDR) taking effect on March 10, global AUM in sustainable funds have almost doubled to $3.9 trillion (all figures are in U.S. dollars).

The sharp rise in assets reflects a large increase in the number of funds that are now classified as sustainable — including both newly launched funds and existing funds that have been reclassified, as ESG disclosure was added to fund prospectuses.

Morningstar reported that its sustainable funds universe grew by 51% globally in the third quarter, with a 65% increase in Europe driving that activity — although it took several months to wade through the updated disclosures, resulting in significant reclassification activity in Q3.

“This growth is mainly due to a significant increase in the number of funds meeting our ‘sustainable investment’ criteria following the introduction of the SFDR,” the report said.

In the third quarter, sustainable funds generated $134 billion in net inflows, which is up from the same period last year but down 15% from the second quarter of this year.

“Sustainable fund inflows in the second quarter still outpaced the overall global fund universe, which recorded a 20% drop in inflows over the same period,” the report said.

Net inflows for sustainable funds in Canada were essentially flat at $1.7 billion in the third quarter, Morningstar said, with 94% of this going into actively managed funds — 62% into equity funds and 25% into fixed income, with the rest in balanced funds.

Additionally, global sustainable fund assets grew by 8% in Q3, “while the overall fund market remained stable,” the report noted.

Canadian assets lagged slightly, growing by 7% in the quarter. However, assets were up 143% over last year, and actively managed assets were up 9% in Q3, whereas passive assets were flat.

Seven firms account for 80% of sustainable assets in Canada — NEI, RBC, Mackenzie, BMO, Industrial Alliance, Desjardins and AGF — the report said, although some of the fastest growing sustainable funds over the past year include offerings from TD, National Bank and Fidelity.

In Q3, 14 new sustainable funds launched in Canada, including six ETFs. For the year, 63 new sustainable funds launched, up notably from 46 for all of last year.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.