The amount of investment into ESG funds grew sharply in the first five months of 2021 and is on course to surpass that of 2020, despite Greenpeace warning that most sustainable funds fail to live up to their name.
As reported in the Financial Times, data from Morningstar shows that ESG bond fund sales topped $54bn by the end of May this year, with the majority of that taking place within Europe.
For the entirety of 2020, the figure was $68bn.
There were 122 ESG funds launched last year, followed by another 44 in Q1 2021. Data from BloombergNEF also reportedly shows that $245.3bn of green bonds have been issued this year, alongside $83.8bn in sustainability bonds and $129.2bn in social bonds. Together, the figures add up to $458.3bn.
In contrast, by the end of May last year, $134.52bn of the same had been issued.
Yet despite the growth in the industry, a report from Greenpeace, Sustainability Funds Hardly Direct Capital Towards Sustainability, found that many funds in Switzerland and Luxembourg did not live up to the promise of their names.
The report was based on a study of whether sustainable investments have a positive capital allocation effect on investment portfolios. The authors also looked at what framework conditions are needed for effective capital allocation.
The authors concluded: “It seemed that, overall, sustainability funds are only effective when it comes to divesting from companies involved in major environmental controversies, but not effective in terms of climate and sustainability portfolio impact improvements. This suggests that the funds’ contribution to achieving the SDGs and the Paris climate target is not yet sufficient.”
One issue raised was that current regulations ‘point into the right direction’, but with ‘major shortcomings’.
Gaps and shortcomings
In the report, Greenpeace said: “The EU has recently brought about major regulatory changes related to sustainable finance, in particular the EU Taxonomy, the Sustainability-related Disclosure in the Financial Services Sector Regulation (SFDR), amendments to the benchmarking regulations, the Non-Financial Reporting Directive (NFRD) and the Markets in Financial Instruments Directive (Mifid II).”
The report went on: “These regulations are quite far-reaching with regard to their focus on sustainability impacts of investments and on the economic activities being financed, as well as their extensive reporting and transparency requirements by various actors in the investment chain. This way, they might serve as game-changers in the market for responsible investments.”
It concluded: “However, it is also important to emphasise that the regulatory framework has gaps and shortcomings. Some of them are quite crucial and must be overcome to deliver the desired results – namely to channel financial flows into sustainable environmental activities and to prevent greenwashing. For further details, see the recommendations below.”
All of this follows the news last week that over half of inflows into Luxembourg funds were directed at sustainable products. The European Sustainable Investment Funds Study, recently released in its first edition, found that 11% of total net assets within Europe were in sustainable funds, with Luxembourg the leading domicile for such products.