ESG fund launches slow sharply as European rules bite -Morningstar

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by Reuters

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ESG fund launches slow sharply as European rules bite -Morningstar

LONDON, April 25 (Reuters) - New sustainable fund launches fell sharply in the first three months of 2023, led by a drop in Europe amid regulatory uncertainty and greenwashing concerns, Morningstar said.

The estimated 113 new sustainable funds launched globally marked the weakest quarter since at least the start of 2020, data provider Morningstar said on Tuesday in its latest quarterly report covering sustainable fund flows.

New launches had previously exceeded 200 in every quarter since mid-2020.

Funds marketed as environmental, social and governance (ESG)-friendly have soared in popularity in recent years as investment managers capitalise on client appetite for more sustainable investments, although the industry suffered a tough 2022 as macroeconomic difficulties knocked sentiment.

"The decline in new products can be partly attributed to the overall market sentiment damped by the challenging macro backdrop but also to greenwashing accusations and the ever-evolving regulatory environment," Morningstar said.

Investment managers have been rebadging hundreds of their sustainable funds sold in Europe since EU regulators last year sought to clarify how to apply elements of new regulation that is designed to tackle misleading sustainability claims.

In contrast to Europe, Morningstar said that the number of fund launches in the United States and the rest of the world was comparable to previous quarters.

Globally, investors added a net $29 billion of new money in the first quarter to sustainable funds, down from $38 billion in the fourth quarter of 2022, Morningstar said, amid worries about rising interest rates, inflation and the prospect of recession.

European funds benefited from net inflows during the quarter while clients pulled cash from U.S. funds amid an ESG pushback from some Republican politicians.

Still, with market valuations rising in 2023 as stock markets recovered, global sustainable fund flows reached $2.74 trillion at end-March, against an all time-high of near-$3 trillion in late 2021, Morningstar noted.

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