Europe Leads World in Sustainable Funding of $2.31 Trillion

Europe remains the leader in sustainable finance, now accounting for 85% of global sustainable funds’ net assets, totalling $2.31 trillion in 2023 representing 19% of the European investment fund market compared with only 6% in 2019.

According to a study entitled “European Sustainable Investment Funds,” conducted by the Association of Luxembourg Fund Industry (ALFI) in partnership with Morningstar and Tameo, ALFI said that despite economic uncertainties, sustainable fund net assets grew by 20.2% in 2023. Luxembourg remains the dominant investment hub for sustainable funds, hosting 34% of these assets, the study revealed.

Global net assets in sustainable funds reached $2.73 trillion by the end of 2023, an increase of $1.57 trillion since 2019. After remarkable growth in 2020 (42%) and 2021 (88%), growth slowed to 3% in 2022, reflecting the broader slowdown in the asset management industry. However, momentum returned in 2023, with net assets growing by 19%.

Britta Borneff, Chief Marketing Officer at ALFI, said that Europe continues to lead the global sustainable investment fund market, driven by a robust regulatory framework, including the Sustainable Finance Disclosure Regulation (SFDR), and strong investor demand.

“The study highlights both the growth and resilience of Europe’s sustainable investment funds. We hope these insights support decision-making, drive progress in sustainable finance, and help build a more sustainable and equitable future,” Borneff added.

Anne Estoppey, Research Analyst at Tameo, said that the dynamic landscape of sustainable finance called for continuous insights to sustain its remarkable growth. The study provided an essential state-of-the-market analysis, tracking key trends, comparing sustainable fund strategies to conventional ones, and delivering data-driven intelligence for investors, policymakers, and stakeholders.

Additional Key Findings

Assets in the European sustainable funds have grown by 20.2% to reach $2.31 trillion in 2023, representing 19% of the European investment fund market compared with only 6% in 2019.

Net inflows meanwhile were down to $80.82 billion, with only $4.2 billion of inflows into active strategies, compared with $76.62 billion in 2022. Conventional fund inflows were however dwarfed – $14.7 billion of inflows, and assets grew only 16.9%.

As many as 350 new sustainable funds were launched in 2023, down from 616 in 2022 and 760 in 2021. In addition, the reclassification of funds was almost neutral, 251 funds reclassified as sustainable while 237 funds reclassified as conventional investment funds.

Since 2019, the average fund size for both conventional and sustainable funds has grown, reaching $488.37 million and $436.65 million respectively in 2023. Sustainable funds have maintained a larger average size since 2020. As size increases, investment managers can take advantage of economies of scale enhancing their operational efficiency.

Demand for passive strategies in European sustainable funds continued to rise in 2023, with their market share growing from 21% of net assets in 2021 to 29% by the end of 2023. Passive strategies also saw a growth rate of 38.8%, significantly outpacing the 14% growth of active strategies, a trend also observed in conventional funds.

Compared with conventional funds, the sustainable funds market is more concentrated, with the top five investment managers accounting for 26% of the total net assets of sustainable funds, versus 21% for the top five in conventional funds.

Concentration varied greatly by domicile, with Luxembourg’s share of the top five representing 35% of total net assets by the end of 2023, versus Ireland, the second-largest hub of sustainable funds, which had the top five investment managers of passive funds managing 75% of total net assets.

Despite a CAGR of 31% since 2019, impact funds accounted for only 18% of the net assets in sustainable investment funds by the end of 2023, down from 27% in 2021. This slowdown mirrors the decline in demand for impact fund strategies, although net flows follow a similar pattern to sustainable fund flows, peaking in 2021 before declining in the subsequent years, the study said.