Active strategies retain lion's share of European ESG bond fund market

Jonathan Boyd
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Research published by Morningstar points to a huge continued dominance by active strategies in the European ESG bond fund market, with data to the end of November suggesting passive vehicles - both ETFs and index funds with explicit ESG mandates - holding €11bn of asests, which represents just 5% of total assets in the asset class.

However, inflows to these passive products were recorded as 6x the amount gathered through 2018.

The findings are contained in its report European Passive ESG Bond Fund Landscape. Other key takeaways include:

  • The European passive ESG bond fund market is small - just 36 passive funds with an explicit ESG mandate.
  • Passive providers see ESG and fixed income as key areas of growth in coming years.
  • Key selling point of ESG bond funds is that management of ESG risks can make bond issuers less vulnerable to credit rating downgrades and default.
  • Almost half of products and 69% of assets are in investment-grade corporate bonds, but product suite is expanding into emerging market and high yield bonds.
  • Green bond passive funds account for 13% of the assets.
  • ESG is not at odds with performance. Broad ESG bond indices have shown similar risk/return characteristics to parent indices.

Jose Garcia-Zarate, associate director, Passive Strategies Research, EMEA, said: "The old-fashioned notion of ESG as a 'nice-to-have' is being replaced by a careful assessment of how good ESG credentials can mitigate investment risk and lead to improved performance over the long-term. In the specific case of bonds, a good management of ESG risks may make issuers more resilient and thus less vulnerable to credit rating downgrades, or even worse, default. And this is what ultimately matters most to bond investors."

To view the full report click here.


Jonathan Boyd
Author spotlight

Jonathan Boyd

Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope.