80% of funds in the EU and UK indicated they considered the Principal Adverse Impact (PAI) indicators from the Sustainable Finance Disclosure Regulation (SFDR) in their investment strategy, up from 50% in 2023, according to the MSCI Funds and European Sustainable Finance Landscape report for 2024.
Sustainability-related funds now dominate the European fund landscape, representing €8 trillion of the region’s €14 trillion in fund assets, particularly within equity and bond funds. Global equity strategies remain popular among Article 8 and 9 SFDR funds, though Article 9 funds are limited in asset class, regional, and sectoral diversity, leaving opportunities for differentiation in future launches.
An intriguing trend observed is the rise in European-domiciled funds with over 5% taxonomy-aligned capital expenditure (capex) exposure—more than twice as much as aligned revenues. Researchers suggest this discrepancy indicates European funds may achieve greater green revenue alignment as companies invest more in sustainable activities, with eligible revenues currently outpacing aligned revenues—signalling a likely trend toward increased alignment soon.
ETFs focusing on utilities reported the highest taxonomy alignment, driven by renewable energy initiatives. This alignment was found even in Article 6 funds, which lack specific sustainability objectives. The strong taxonomy alignment within the European utility sector, with 60% of its investment activity already aligned, underscores its pivotal role in transition finance.
Only 23% of EU green bonds to meet December ‘gold standard’
Article 8 funds rebounded to net inflows of €44 billion in the first half of 2024, with continued preference for indexed products, while Article 9 strategies faced outflows, primarily from active funds. As of mid-2024, assets under management for Article 8 and 9 funds reached €
6.9 trillion and €330 billion, respectively, illustrating investor caution yet persistent interest in sustainability-focused products.
Improved transparency is evident, with triple the number of funds submitting data in the European ESG Template (EET) compared to last year. A significant 80% of funds now incorporate Principal Adverse Impact (PAI) indicators, up from 50% in 2023.
The report also pointed to substantial implications from Esma’s May 2024 fund-naming guidance, which has led to fewer Article 8 and 9 funds using stringent sustainability-related terms. Green bond and infrastructure funds, particularly those with fossil-fuel exposure, may need to reconsider naming conventions to avoid regulatory challenges, said the researchers.
With the UK’s nascent Sustainability Disclosure Requirements (SDR), only six UK-domiciled funds currently meet the 70% Sustainable Investments (SI) threshold under MSCI’s criteria, suggesting room for growth in sustainable fund offerings.
