Demand for UCITS bond funds that apply ESG tilts has been steadily rising, according to the European Fund and Asset Management Association (EFAMA), as investors poured €102bn (£85.8bn) into the investment vehicle last year.

The latest issue of EFAMA Market Insights series, ‘Sustainable UCITS Bond Funds for a Better Future', revealed sustainable UCITS bond funds attracted €33bn more than traditional UCITS bond funds last year, which took in net new money of €69bn.

Net assets climbed to €621bn, representing 20% of total UCITS bond fund assets, while risk-adjusted returns continue to be higher than traditional funds.

Fees on the investment vehicle were lower, according to EFAMA, with the average cost of a sustainable UCITS bond fund reaching 59 basis points in 2021, compared to 76 bps for traditional UCITS bond funds.

"Sustainable bond funds appear well suited to meet the needs of investors who are looking for a favourable risk-return profile and sustainable and cost-effective investment solutions," said Vera Jotanovic, senior economist at EFAMA.

"Looking forward, we hope to be able analyse the portfolio composition of this type of fund and, in particular, the extent to which they invest in green bonds."

Sustainable bond funds tend to display low credit risk, with just 1% of their components averaging below a B rating, EFAMA said.

They also tend to allocate far less to bonds rated below BBB, compared to traditional bond funds.

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At the end of 2011, net assets of sustainable bond funds in total UCITS bond funds was 16.5%. The share climbed to 20% in 2021.

According to Morningstar's direct database, the number of sustainable bond funds rose to 1,411 at the end of 2020, compared to 4,548 traditional bond funds.

Tanguy van de Werve, EFAMA director general, added: "We expect the adoption of the European green bond standard and relevant market-led initiatives to boost the supply and demand for sustainable bonds and to have a positive impact on the development of Article 9 bond funds going forward.

"This would strengthen the EU leadership in the sustainable finance space."