Goldman Sachs: investors are switching to sustainable funds

Greenwashing is no longer enough: European investors are switching to sustainable funds in droves, as they increasingly want to do the right thing rather than just be seen to be doing the right thing.

This is what emerges from a new report published by Goldman Sachs.

According to the US investment bank, since the beginning of the year 435 equities and fixed income funds, a total of $131 billion, have switched from non-ESG compliant Article 6 to “sustainable” Article 8. “It is increasingly difficult to market Article 6 funds,” said Evan Tylenda, head of EMEA, GS Sustain, one of the authors of the report.

Since 2019, when the EU’s Sustainable Finance Disclosure Regulation (SFDR) came into effect, it has had “a significant impact on capital flows”. Article 8 and Article 9 funds have attracted 3.4 times client flows than Article 6 funds.

SFDR is achieving its objective to direct capital towards sustainable activities. In order to register an Article 8 fund, an asset manager needs to commit to promoting ESG, while an Article 9 fund must make ESG its objective and target 100% sustainable investments.

In order to comply with investors’ requests, fund managers have been switching away from investments in tobacco (-74%), aerospace and defense (-71%) and fossil fuels (-52%), while increasing their exposure to healthcare technologies (+200%), consumer services (+185%), water utilities (+202%) and independent producers of renewable energy (+789%).

In the real estate sector, residential REITs have been penalised, losing 42% since the beginning of the year, while there has been a massive growth in mortgage REITs  (+880%).

Across the board, funds registered as Article 9 are “seeing the most consistent inflows across equities and fixed income,” said Tylenda.  

This trend is likely to stay and strengthen, according to Goldman Sachs, but much will depend on the updates of existing EU regulations on ESG that are expected this year and in 2024, that will include new regulatory technical standards that will put more pressure on firms to back up their ESG claims.

“We expect a continued shift in upgrading towards Article 8+ and eventually Article 9 as we continue to hear that clients are demanding more differentiated and innovative products,” the report states. The demand for ESG products will lead fund managers to become increasingly ambitious in the sustainability targets they set.