Various factors will combine to ensure that the growing demand for Europe-domiciled energy transition funds persists, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

The assets under management (AUM) of Europe-domiciled energy transition funds rose from €4.4 billion (US$5.2 billion) in 2016 to €50.7 billion in February 2021, according to Morningstar data. This equates to a compound annual growth rate (CAGR) of 63% over five years. The bulk of the growth in AUM took place in 2020, with assets increasing 437.8% year-on-year.

“Sustainable investing has been around for some time, but recently there has been a surge in demand for Europe-domiciled energy transition,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates.

Energy transition funds target companies and technologies that enable a shift from fossil fuels to more sustainable forms of energy. Most portfolios are diversified across geographies and across the range of specific activities, from energy generation to energy storage and sustainable transport. Many funds focus on small and mid-cap companies, believing that these offer significant innovation and potentially higher returns than larger companies. The portfolios of energy transition and net-zero funds are diverse. Some focus on specific fields, such as semiconductor and electronics companies that specialize in energy efficiency.

The increased demand for energy transition funds in 2020 can be attributed partly to the products’ strong returns. Another factor is a shift in the economics of renewable energy, which has become cost competitive with fossil fuel energy.

“These trends have made energy transition funds resilient through the COVID-19 crisis. In fact, the coronavirus outbreak may even prove to be a further driver for energy transition, given that many governments’ stated plans for post-pandemic economic recovery have a strong environmental dimension,” says Zumbo.

Public policy and regulation have emerged as the biggest factors driving the net-zero and energy transition trend. The EU is committed to achieving net-zero carbon emissions by 2050 and in December last year it set a binding target to cut greenhouse gas emissions by 55% by 2030 compared to their level in 1990.

Underpinning these commitments is the EU’s Sustainable Finance Directive Regulations (SFDR), implemented on March 10 this year. SFDR introduces new environmental disclosure requirements for investible companies and funds. In this regard, generalized claims of “sustainability” or “green” credentials will be subject to explicit and detailed disclosure and funds will be placed in different categories depending on their credentials.

The U.K. is also moving to the same direct. In November 2020, the U.K. government set out a path toward mandatory climate-related disclosures, which will cover all U.K.-authorized asset managers by 2023. The U.K.’s proposals make full disclosures a legal requirement, whereas the EU plans operate on a “comply-or-explain” basis.

“The targets and the strategies of relatively new Europe-domiciled energy transition and net-zero funds are more specific than earlier generations of sustainable investment, reflecting a step-change in the demands and expectations of consumers and regulators,” says Zumbo.

Other Findings:

• February saw Europe's fund industry continue its positive start to 2021, with AUM climbing 14.3% to end the month at €10.4 trillion. This rise was driven almost equally by robust sales performance and strong investment returns. Optimism surrounding the COVID-19 vaccine rollout and the prospect of businesses reopening helped power stock markets worldwide. Appetite for thematic funds and products exposing clients to Asian markets continued to grow. Nine of the 10 best-selling active funds belonged to these categories.

• The U.K. mutual fund market suffered monthly outflows again, losing £4.8 billion (US$6.6 billion) in net redemptions in February despite a rise of 2% in the U.K.'s FTSE All Share index during the month. Money market funds again accounted for the bulk of the net redemptions, bleeding £5.7 billion in February. Property and equity funds also registered outflows, bleeding £407 million and £354 million respectively. Bond funds were the best-selling asset class, attracting £883 million in February.