Green Bond Funds Attract Sustainable Flows

Morningstar

Europe-domiciled sustainable funds saw net inflows in the first four months of 2024, after struggling in 2023. As in the broader market, European sustainable funds benefited from investors’ appetite for fixed income strategies amid high interest rates, while equity and allocation funds suffered outflows.

That said, only funds falling within the scope of Article 8 of the Sustainable Finance Disclosure Regulation collected new money. Article 8 encompasses “light green” funds with an environmental, social, and governance focus. These vehicles recorded net inflows of €16.85 billion (£14.24 billion) in the year to date, though flows turned negative in April after three consecutive positive months in the first quarter. Preliminary data suggest that May, again, was a positive month for Article 8 funds and final data for May will be released later this week. 

Article 9 funds, also called “dark green” funds, demonstrate a sustainable investment objective. They recorded four consecutive months of outflows, bringing year-to-date net redemptions to €7.13 billion, according to data from Morningstar Direct.

The Article 8 and Article 9 fund universe encompasses open-end and exchange-traded funds. Money market funds, funds of funds, and feeder funds are excluded. Funds with no ESG characteristics are classified as Article 6, “not stated” in Morningstar Direct.

The overall postive sentiment in the sustainable investment space was mirrored by the wider European fund landscape. In total, Europe-domiciled funds gathered €67.1 billion in the first four month of the year, with each month showing positive net inflows.  

Flows by EU SFDR Fund Type: 1 Year

Source: Morningstar Direct. Data as of June 12, 2024. 

Fixed-Income Funds See Positive Net Flows 

Article 8 fixed income funds garnered €60.42 billion between January and April, and Article 9 bond funds €4.22 billion. This compares to net inflows of €9 billion into Article 6 funds. 

“The higher inflows into Article 8 bond funds relative to Article 6 bond funds may reflect investor expectations that the ‘higher for longer’ interest-rate environment may favor investment-grade-type of bonds, which tend to make up ESG-oriented portfolios”, says Hortense Bioy, global head of sustainability research at Morningstar. 

In January, financial markets had priced in that the European Central Bank will cut key interest rates five times in 2024, with a first cut in the spring. Now, expectation centrer around one or two more cuts this year, after the rate cut earlier this month. The ECB also raised its inflation outlook, which dampened hopes of monetary easing.

The full article is available here. This article was published at Morningstar Investment Managers & Funds.