EU green fund rules helped draw money into ESG products

Europe’s green fund labels appear to have done something investors care about: they moved money. A National Bank of Belgium study found that the EU’s Sustainable Finance Disclosure Regulation helped draw new investor cash into ESG funds after the rules were announced and first applied.

ESG investing refers to strategies that consider environmental, social and governance factors alongside financial ones. The SFDR, announced on Nov. 27, 2019, and applied from March 10, 2021, was designed to make fund claims easier to compare in the EU by sorting products into broad disclosure categories.

How the labels work

The regulation split funds sold in the EU into three main groups. Article 6 funds are conventional products without a specific ESG focus. Article 8 funds promote environmental or social characteristics and must explain how they do that. Article 9 funds are impact funds, meaning they are positioned around a sustainable investment objective.

That classification matters because fund flows, the net money entering or leaving a fund, can be shaped by trust. If investors believe a label reduces the risk of “greenwashing,” or overstating a product’s sustainability credentials, they may be more willing to move money into labeled funds.

According to the National Bank of Belgium study, the time gap between the SFDR’s announcement and its phased rollout allowed researchers to examine how investors reacted. The study found a statistically significant increase in flows into Article 8 and Article 9 funds around the announcement and initial implementation. Article 6 funds also attracted more money, but that increase was not statistically significant, according to the study.

The analysis said the flow data were adjusted to remove the effect of fund performance and exclude funds that were reclassified from one category to another. That matters because rising markets can make funds look larger even without new investor money, while reclassification can blur whether investors actually changed where they put cash.

Who moved the money

The study found that institutional investors were more likely to switch toward ESG funds. That shift was stronger in countries where sustainability concerns were more culturally accepted, according to the researchers.

Private investors in those countries also moved more assets into ESG funds after the regulation made the labels clearer, according to the study. Institutional investors faced a similar pull, with the researchers pointing to social pressure and reputational risk as factors that could make conventional funds less attractive in those markets.

Fund managers also responded. The study found that many funds that had been only mildly green before the SFDR announcement became greener as the rules came in, positioning themselves to attract new assets and investors.

That shift had a business payoff for managers. According to the study, ESG funds charged higher fees on average, meaning managers could benefit both from fresh inflows and from better profitability on those assets.

The later stages of regulation showed a limit. The analysis found that stricter additional requirements did not generate many new flows after the initial rush into ESG products. For fund companies, that suggests the early clarity of the labels helped bring in assets, while later compliance demands added costs without the same boost to assets under management, the total pool of money a fund manager oversees.

This story draws on original reporting from Klement on Investing.