Investors based in Europe are diminishing their focus on sustainable equities, while bond funds are experiencing a resurgence in popularity.
The European green bond market has demonstrated resilience in the face of market volatility, as revealed by recent data from the Climate Bonds Initiative and Lipper.
Article 8 and 9 money market funds, denominated in both US dollars and euros, have seen increased allocations this year, with over €80bn in new inflows for US dollar-denominated funds alone. This trend is reflected in Lipper's latest fund flow data, which tracks trends in the British and European mutual fund markets.
The Climate Bonds Initiative's data also indicates a significant growth and resilience in the global green bond market. The global Green Sustainable Securities (GSS) bond market has surpassed the €6 trillion mark, a notable trend in the financial industry.
However, the story isn't the same for all asset classes. Sterling-denominated money market funds reported net outflows in the second quarter, and European investors have sold off €20bn in Article 8 and 9 equity funds in the year to date. Conventional equity funds have reported nearly €140bn in net inflows in the same period.
Despite this, investor appetite for bond funds has also increased, with over €100bn in inflows year to date, over half of which went into Article 8 and 9 funds.
The resilience of the European green bond market is underpinned by several key factors. Alignment with EU Taxonomy and Regulatory Support, Investor Demand and Performance Stability, Sector Leadership and Use of Capital, Market Maturity and Issuer Experience, and Strong Market Momentum Despite Macroeconomic Challenges are the five main factors driving the market's resilience.
The resilience of green bonds in the European market is due to strong regulatory frameworks and alignment with EU sustainability standards, consistent investor demand driven by favorable risk-return profiles, sector leadership in taxonomy alignment, and continued use by experienced issuers despite market volatility and macroeconomic challenges.
Interestingly, Lipper's figures indicate that money market funds have taken over as the sustainable asset class of choice in Europe this year, with US dollar- and euro-denominated Article 8 and 9 money market funds being the most popular asset classes in the second quarter.
In conclusion, the European green bond market continues to show resilience amidst market volatility, driven by strong regulatory frameworks, investor demand, sector leadership, market maturity, and issuer experience. The trend towards money market funds as the sustainable asset class of choice in Europe is also a significant development in the financial industry.
[1] Climate Bonds Initiative. (2021). Global Green Bond Market Report 2021 H1. [2] Climate Bonds Initiative. (2020). Global Green Bond Market Report 2020 H1. [3] Climate Bonds Initiative. (2019). Global Green Bond Market Report 2019 H1. [4] Lipper. (2021). Lipper Fund Flows Europe Region. [5] Climate Bonds Initiative. (2021). European Green Bond Market Update Q2 2021.
- Amidst the fluctuating market conditions, the European green bond market's resilience can be attributed to strategic investing and alignment with European environmental-science policies, such as EU Taxonomy, which have attracted substantial finance and catalyzed growth.
- The Climate Bonds Initiative's data signifies a paradigm shift in the investment landscape, with a rising preference for environmental-science-oriented financial instruments like green bonds over conventional assets like equity funds, mirroring trends in science-focused finance and investing.
