ESG strategies accounted for 65% of all inflows into European-listed ETFs in 2022 despite a challenging market environment for sustainable products.

According to data from Morningstar, ESG ETFs recorded inflows of €51bn in 2022 out of total flows of €78.4bn for all ETFs in Europe.

The figure is much lower than the €160bn investors put into ETFs in 2021, where ESG ETFs accounted for 51% of total inflows.

Assets in ESG ETFs and exchange-traded commodities (ETCs) in Europe have grown to €248.8bn and account for 18.8% of total assets, Morningstar said.

Jose Garcia-Zarate, associate director of passive research strategies at Morningstar, added: “The trend in favour of ESG has strengthened notably in the past three years.

“Driven by a mix of investment in new products and the repurposing of mainstream funds into ESG propositions, annual flows into ESG products as a proportion of total flows into the ETF and ETC market have ballooned to a record high of 65% in 2022 from 14% in 2019.”

The highest asset gathering ESG ETF of 2022 was the iShares MSCI USA ESG Enhanced UCITS ETF (EEDS), which recorded inflows of $4.4bn over the past 12 months, according to ETFLogic.

Equity ESG strategies account for 75.5% of ESG ETFs with €188.1bn assets, making up 21.3% of total assets invested in equity ETFs in Europe while fixed income ETFs house €60.7bn.

Despite these inflows, ESG equity has underperformed relative to its broader market counterparts over the past year. The S&P 500 ESG index returned -15.3% over the past 12 months versus -14.5% for the S&P 500.

The flows come at a point of growing regulatory concerns around greenwashing of ESG funds.

Last November, the European Securities and Markets Authority (ESMA) said it is planning to implement rules on how asset managers should name their ESG-related funds in a bid to protect investors.

The plans would see a minimum threshold of 50% sustainable investments for funds using their ‘sustainable’ in their name and an 80% threshold for funds using ESG.

Several asset managers also downgraded ESG-related ETFs from Article 9 to Article 8 under the Sustainable Finance Disclosure Regulation (SFDR) in recent months.

Roughly €50bn of Paris-Aligned Benchmark and Climate Transition Benchmark ETFs have been reclassified as asset managers continue to seek regulatory clarity.

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