The rise of the sustainable fund market and its role in financing sustainable development

Sustainable funds - mutual funds and exchange-traded funds (ETFs) that integrate sustainable development-related considerations in their asset allocation process - have been growing rapidly in recently years.

This market has the potential to contribute to sustainable development through investments in sectors relevant to the attainment of the Sustainable Development Goals (SDGs), including in developing countries.

This paper aims to analyse the latest developments in the global sustainable fund market, asses its sustainability performance and its alignment with the SDGs, and discuss the challenges and opportunities for the further expansion of this market.

Key findings:

  • The number of sustainable investment funds has almost doubled in the last five years, reaching 3,987 by June 2020, with assets under management (AUM) of over $1.7 trillion, just over 3% of the assets of the world's open-ended funds. Net investment flows to these funds reached $159 billion in 2019 and are estimated to surpass $300 billion in 2020.

  • The sustainable fund universe includes 3,435 sustainable mutual funds and 552 sustainable ETFs, with AUM of $1.56 trillion and $174 billion respectively. Equity funds account for about two-thirds of sustainable funds in both number and assets, with the remainder split between fixed income and mixed allocation funds.

  • Geographically, the majority of funds are domiciled in developed countries, particularly in Europe, and target developed regions in their portfolio selection. Developing and transition economies host about 5% of the world's sustainable funds by number and less than 3% by assets.

  • Based on an analysis of over 800 sustainable equity funds, for which sustainability data are available, sustainable funds on average outperform the overall market in terms of sustainability, and have significantly lower exposure to fossil fuels and controversial sectors.

  • On average, these funds deployed 27% of their assets across eight key SDG sectors, such as health, renewable energy and infrastructure. However, the wide variance in sustainability ratings among funds indicates that a large share of underperforming funds may not meet their sustainable credentials.

  • Analysis suggests that the funds' returns did not systematically suffer a financial disadvantage for having a sustainable tilt in their portfolios. Over a period of three years, there was almost no difference between sustainable funds and their respective benchmarks in terms of financial performance.

  • Going forward, sustainability integration should not be limited to sustainable funds. Instead, the whole fund industry needs to enhance its sustainability disclosure and performance and take actions to channel more investments into SDG-related sectors.

  • Actions need to be taken by regulators and the fund industry in both developed and developing countries to support the growth of sustainable funds both domiciled in, and with a portfolio exposure to developing countries.

  • In order to address "sustainability washing" concerns, fully transparent self-reporting on the sustainability performance of funds, supported by external auditing and regulation, will be needed. Stock exchanges can also put in place relevant guidelines or demand greater disclosure in their listing requirements, with support from securities regulators.