ESG was one of the major drivers for the growth of the European fund industry over the course of 2021, and this was in spite of a lack of regulatory clarity.
Behind that trend in ESG were the European Commission’s new EU regulations based on the Action Plan on Financing Sustainable Growth.
However, market regulators’ plan to have all regulations, a taxonomy, and the respective technical standards in place by the end of the year failed. The technical standards needed to fulfill the reporting duties for the implementation of the EU taxonomy were delayed twice over the course of the year.
Investors left guessing
The lack of the technical standards leaves investors guessing to some extent – it is not clear for them if the funds within their portfolio will meet the demand of the new regulation once the technical standards are in place.
This is also true for the classification of a fund based on the articles 6, 8, and 9 of the Sustainable Finance Disclosure Regulation.
Considering this, the growth within ESG products seen in 2021 might only be the tip of the iceberg since a number of investors could well be standing on the sidelines waiting for clarification from regulators.
Integration of ESG factors in portfolio management of funds is clearly already key for the success of distribution in retail and wealth management because a number of distribution platforms and banks decided to only offer article 8 or 9 funds.
Wider business alignment
This is because they are under pressure to align their product and distribution strategy with the overall ESG strategy of the parent company.
As an increasing number of corporations and asset owners are rethinking their overall ESG strategy and aligning all their businesses respectively, we can expect to see this trend continue.
In addition, it is already foreseeable that the demand for ESG-related funds and ETFs will further increase as more and more investors will integrate ESG-related products into their portfolios.
This forecast explains, at least in part, why so many funds get repurposed and start to integrate ESG criteria in their portfolio management processes.
Repurposing funds
Even those promoting ETFs have started to repurpose some of their plain vanilla products by changing the underlying index from a conventional index to an ESG-related index.
ESG-related funds will continue the trend of 2021 and will be a key driver of the growth of the European fund industry over the course of 2022 regardless of the general market trends.
