La Française: Demand for ESG/sustainable investments has decreased

October 31, 2024

Sustainable assets under management rose to a record high of $3.5tn in the first half of the year, up +7.7% year on year. Sustainable assets under management (AuM) represent 7% of total AuM globally.

This is a result of market performance as well as net inflows. If AuM from the private sector were the only lever used to bridge the financing gap, we would need total sustainable AuM to grow at least ten-fold by 2030 (with a need for $7tn on average in annual financing). 

However, when looking at net flows into sustainable funds across the globe, demand is weakening. Indeed, total inflows year to date amount to $20bn compared to yearly inflows of over $100bn in 2022 and 2023. This reflects a clear slowdown in 2024. However, it is important to note that inflows were already short of financing needs in previous years.  

The successful redirection of capital flows towards green assets requires more than just the roll-out of standards and best practices, regulating the sale of sustainable investment funds. The successful redirection requires that governments boost demand for sustainable investments.

How to boost demand will be at the top of the agenda for COP29, and there are a variety of options, ranging from public-private financing partnerships to establishing incentives or regulations to redirect capital and gradually close the financing gap.

ESMA ESG fund name guidelines are expected to enter into force by the end of this year. Comments on this regulation, consequences, etc.,  

While market participants are currently reviewing their product portfolio to ensure compliance with ESMA fund name guidelines, some local regulators are yet to communicate on the transposition of the guidelines. The industry is eager to assess if the fund name guidelines will become the market standard or if the guidelines will be adapted to existing local practices. The outcome will be important in shaping the future of the asset management landscape and will influence competitivity.

Another consideration is the lack of clarity regarding the application of the guidelines to dedicated green financing instruments such as green bonds. Indeed, ESMA name guidelines require that issuers comply with Paris-Aligned Benchmark (PAB) standards. PAB related criteria such as deriving 50% or more of revenues from electricity production with a GHG intensity above 100gCO2e/kwh could indeed exclude utility issuers who have been active in the green bond world, using the proceeds to fund their renewable power capacity. The potential exclusion of those issuers, despite the dedicated use of proceeds format, would negate efforts to accelerate the financing of those assets and further widen the green financing gap.  

Overall, fund name guidelines are welcome if local applications are coordinated, creating a single playing field for fund manufacturers and investors with regards to the intention and purpose of ESG strategies. This would be consistent with the gradual evolution of SFDR which is expected to introduce a categorization system that should make it easier for investors to understand and compare the sustainability profiles of funds.