The number of sustainable fund launches in Europe hit a record low in the first quarter of 2023 as product providers struggled with fund classification regulation, according to Morningstar.
The data provider reported the number of newly launched sustainable funds declined from 155 in the fourth quarter of 2022 to a historical low of 53 at the beginning of this year.
Morningstar said product providers have withheld from launching sustainable products due to the challenges of interpreting the Sustainable Finance Disclosure Regulation (SFDR).
The uncertainty has caused many asset managers, including Lombard Odier Investment Management, to downgrade Article 9 funds to an Article 8 label.
Morningstar anticipates a surge of sustainable fund launches since the European Commission issued amended guidance to clarify SFDR categories.
In the report, Morningstar said: “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.”
Climate remained the most popular theme represented among new product launches, as 15 new climate-related funds were unveiled in the first quarter.
Even though the number of sustainable fund launches has declined, Europe remains the largest market for sustainable funds.
Morningstar reported European sustainable funds attracted net inflows of $32.3 billion in the first quarter of 2023, which represented 43% of total European fund flows.
However, net inflows were down compared to $40.3 billion of net inflows in the previous quarter, due to macro conditions, including high inflation and interest rates.
Despite lower inflows, Morningstar revealed assets in European sustainable funds rose for the second-consecutive quarter, reaching $2.3 trillion at the end of March 2023, which was an 8.2% increase from December 2022.
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