Europe leads the way with ESG passives amid favourable regulatory backdrop

Assets in passive sustainable funds in Europe grew to a record $188.8bn by the end of June

Tom Eckett

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Supportive regulatory headwinds ensure Europe will continue to remain the dominant region for passive sustainable funds.

According to Morningstar’s 2020 Global Landscape on passive sustainable funds, assets in passive sustainable funds in Europe grew to a record $188.8bn by the end of June, representing 9.2% of passive assets in the region, up from 5% at the start of 2016.

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This rapid growth in assets has led to the upgrade of sustainable investing from a niche to a mainstream investment consideration with passive sustainable assets in Europe accounting for 76% of global assets under management (AUM).

The growth in ESG passives has been driven by supportive regulatory measures and institutional investors with sustainable mandates, particularly Scandinavian public pension, sovereign wealth and insurance funds.

Recent requirements have included disclosures and explicit minimum ESG levels for SWFs and public investment vehicles.

Furthermore, the report highlighted recent legislation passed by European regulators that address the lack of transparency and uniformity in the categorisation of ESG benchmarks.

This led to the introduction of the Low Carbon Benchmarks Regulation in 2019 to tackle potential greenwashing issues.

“As part of the broader benchmark legislation, index providers are required to state whether a given index pursues ESG objectives,” the report added.

ETF explosion

This year has seen a record number of ETF launches and there still remains the second half of the year. In 2020, there have been 46 ESG ETF launches, 11 more than the previous highest in 2018.

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Kenneth Lamont, senior manager, research analyst, passive strategies, at Morningstar, and co-author of the report said: “Europe has been the epicentre of much of the sustainable product development.

“Sustainable index funds have historically been the passive vehicle of choice in Europe, but growth in size and breadth of the offering in the ETF space has begun to redress the balance.”

Why incorporating ESG in fixed income can deliver a superior risk-return profile

Lamont added regulatory developments has led to further product innovation with a number of issuers including Lyxor launching a string a climate change ETFs in accordance with the Paris Climate Agreement.

This year, BlackRock has pulled away from UBS Asset Management as Europe’s largest ESG ETF issuers with $18.4bn AUM while UBS AM has $13.1bn.

“It is unsurprising to see BlackRock, the dominant European ETF provider, claim the top spot,” the report continued. “The largest by assets, the brand owned by BlackRock also offers the most comprehensive fund offering. UBS, one of the first movers in the space, takes second place.”

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