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Jan 13, 2023

European ESG ETFs grab 65 percent of inflows in 2022, finds Morningstar

Overall ETF market shows resilience amid falling valuations, says new report

While companies with high ESG scores often underperformed the market in 2022, inflows to ESG ETFs in Europe remained strong, according to new research.

ESG ETFs recorded €51 bn ($54 bn) in inflows during the year, accounting for 65 percent of all fund flows to the European ETF market, reports Morningstar.

Against a backdrop of falling valuations for equities and bonds, ESG ETFs also saw their overall assets rise: ESG assets at year-end stood at €248.8 bn, compared with €235.3 bn in 2021.

Frankfurt skyline
Frankfurt, Germany

During 2022, ESG funds generally underperformed as investors embraced energy stocks, dumped high-growth tech names and rotated from growth to value.

For the year, the MSCI Europe ESG Leaders index was down 17 percent, while the MSCI Europe Energy surged 29 percent.

Thematic ETFs, which offer exposure to a particular trend, such as wind power, cloud services or cyber-security, also had a bad 2022, finds Morningstar, pulling in just €1.3 bn for the year, versus €11.2 bn in 2021.

Resilient performance

Beyond sustainable funds, the broader European ETF market showed ‘remarkable resilience’ in 2022, explains Morningstar, notching up €78.4 bn in annual inflows.

‘This was down from €160 bn in 2021 but, compared with the strong outflows from active funds, ETFs – and passive funds in general – weathered the storm better,’ says Jose Garcia-Zarate, associate director of passive strategies at Morningstar, in a statement.

‘Despite the positive flow picture, the fall in equity and bond market valuations drove assets under management in ETFs down to €1.32 tn from €1.41 tn in 2021.’

The ‘undisputed market leader’ for European ETFs is iShares, reports Morningstar, noting that it increased its market share marginally to nearly 45 percent over the course of 2022. Amundi is the second-largest provider, following its January 2022 acquisition of Lyxor.

Meanwhile, Vanguard ‘bucked the trend’ in the market by recording positive inflows and higher assets compared with the previous year. Morningstar puts this down to the investment firm’s ‘minimal exposure to ESG relative to its competitors’.