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When evaluating the fund flows and assets under management in the European ETF industry by the respective Sustainable Finance Disclosure Regulation (SFDR) articles, one should not be surprised that the European ETF industry is heavily tilted towards article 6. This means the majority of fund flows and assets under management are invested in products which do not take ESG criteria into consideration.

In more detail, on August 31, 2024, 1,442.5 bn EUR, or 76.77%, of the overall assets under management were invested in ETFs assigned to article 6 of the SFDR, while 414.9 bn EUR (22.08%) were held by ETFs assigned to article 8, and 15.7 bn EUR (0.83%) were held by ETFs assigned to article 9. In addition, one needs to keep in mind that not all jurisdictions in Europe fall under the SFDR— it is, therefore, no surprise that 5.9 bn EUR (0.31%) were held by ETFs without an assignment to the SFDR.

Graph 1: Market Share of Assets Under Management in the European ETF industry by SFDR Article

(Click on image to enlarge)

Source: LSEG Lipper

The reason for this can be seen in the fact that most investors are still measuring their portfolio against conventional benchmarks and therefore prefer passive instruments aligned with their investment goals.

The same reason is true for the fund flow trends in the European ETF industry since ETFs assigned to article 6 of the SFDR enjoyed the highest estimated net inflows (+125.1 bn EUR) over the course of the first eight months of 2024, followed by ETFs assigned to article 8 (+22.2 bn EUR). Conversely, ETFs with no assignment to an SFDR article (-0.2 bn) and ETFs assigned to article 9 (-2.4 bn EUR) faced outflows over the course of 2024 so far.

Graph 2: Monthly Estimated Net Flows in the European ETF industry by SFDR Article

(Click on image to enlarge)

Source: LSEG Lipper

That said, the fund flow trend for ETFs assigned to article 9 of the SFDR might be reversed once the so-called green industries are back in favor since the growth expectations and/or the earnings of a number of these companies have been hit by high interest rates. With regard to this, these companies may profit from the new economic environment with declining interest rates.

Nevertheless, there might be a lack of investor interest for ETFs assigned to article 8 or 9 of the SFDR as long as the majority of portfolios are benchmarked against conventional benchmarks.

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