Despite a global decline in interest in environmental, social, and governance (ESG) investing, ESG ETF sentiment in Europe remains optimistic for 2023, according to a recent report by Bloomberg. Furthermore, the report speculates that there might be a possibility of a recovery in global ESG ETFs too in the upcoming year.

How ESG Funds Work

ESG investing is a relatively new form of investing that looks at the sustainability of a company with regard to environmental, social, and corporate governance factors besides the profitability element when deciding what to invest in.

In this light, ESG exchange-traded funds (ETFs) aim to make sustainable investing easy for investors. Using ESG ETFs, investors can invest responsibly and allocate their capital towards more sustainable companies while enjoying the advantages of ETFs like trading flexibility, portfolio diversification, risk management, lower costs, and tax benefits.

ESG funds were all the rage over the past couple of years. An estimated $120 billion was poured into ESG investments in 2021, more than double the $51.1 billion captured by such funds in 2020, according to a report by Conservice ESG.

Likewise, there has also been a constant increase in the number of available ESG funds to US investors, which reached 534 in 2021, up 36% from 2020. Additionally, in the fourth quarter of 2021, 45 funds were launched in the US with sustainable mandates, the highest number of sustainable funds launched in one quarter.

However, things started to go south for ESG funds this year amid a global market rout. According to Bloomberg, annual global sales of ESG bonds will fall for the first time ever in 2022. Sales of ESG bonds around the world are about $635 billion, down 30% this year from $910 billion issued in all of 2021.

The report added that green bonds, debt securities designated to finance environmentally friendly projects, are down 23% this year at $360 billion, also on course for the first decline ever. Furthermore, borrowers now have to offer a higher interest rate for these bonds compared to traditional debt, which is likely to slow much of the momentum in the green bond market.

ESG ETF Sentiment in Europe Remains Positive

Despite a global downtrend in ESG investments, sentiment in Europe remains positive for 2023. In its 2023 outlook for global ESG, Bloomberg said European investors will likely continue to pour money into sustainable investments in the upcoming year. The report read:

“European ESG ETFs may continue to see inflows, especially with funds seeking Article 9 labels under the EU’s Sustainable Finance Disclosure Regulation (SFDR), and an amendment in MiFID II regulations on disclosing investors’ sustainability preferences can also support demand for ESG ETFs.”

The report noted that recovery is also plausible for global ESG ETFs “if the long-term growth trend remains intact.” Moreover, the fact that investors globally continue to demand ESG-informed products further highlights the likelihood of a 2023 reversion.

“The current lows in our ESG ETF sentiment metric are likely the result of short-term performance-driven reactions to energy prices and economic growth risks. The scores turned negative in early 2022 and continued falling to minus 0.17 in October, from a 0.28 peak in December 2020.”

This article originally appeared on The Tokenist

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