Climate funds, including those investing in climate solutions, clean energy, clean tech and green bonds, have seen a significant increase in flows over the last 12 months, according to Hortense Bioy, director of sustainability research at Morningstar.

In Q4 2020 and Q1 2021, six of the ten best-selling funds in Europe were related to climate, attracting more than €9bn in net inflows.

Speaking at Incisive Media's Sustainable Investment Festival on 24 June, Bioy (pictured) said: "Covid-19 has accelerated investor interest in sustainability issues, it has forced many people and companies to think about sustainability issues and climate change in particular.

"Another driver is the prospect of more regulation, but also the fact that many investors have come to realise and accept that ESG funds offer comparable, and in some cases even better performance than conventional funds."

Overall, Morningstar's research shows that European sustainable funds saw record high inflows in Q1 of €120bn, marking 51% of overall fund flows during the quarter.

ESG ETFs were also more popular than any other category, taking in 54% of total ETF inflows in Q1 and accounting for 10% of all money invested in ETFs in Europe as of 31 March 2021.

Bioy believes this trend will continue, as providers keep expanding their ESG ranges and also repurposing their funds to gain an ESG focus.

In fact, some 20-25% of all sustainable funds available in Europe are now repurposed funds. Bioy said these funds often look very similar to newly launched ESG vehicles and there is no indication that repurposed funds constitute a risk of greenwashing.

Meanwhile, Morningstar also looked at compliance with the recently launched European Sustainable Finance Disclosure Regulation (SDFR), which mandates fund managers to report on the ESG risks of their funds and the negative impact they are having on the society and the planet by the end of the year.

It found that 28% of assets in Europe have been classed under the 'light green' Article 8 label, but just 3% of assets are categorised as 'dark green' Article 9.

"We expect these numbers to increase by the end of the year as asset managers enhance existing strategies, repurpose funds and launch new ones that meet the Article 8 and 9 requirements," said Bioy.

However, she noted that just two of the 20 largest Article 8 and 9 funds in Europe have any indication of 'ESG' or 'sustainability' in their name.

She said "this reflects some of the confusion out there, and why some people are saying that the SFDR is giving opportunities to managers to greenwash", adding she is looking forward to seeing how the landscape will look next year.

Bioy noted that asset managers have made large investments in ESG capabilities and research, but she has not seen fund fees rise in the active space as a result - though ESG ETFs do tend to be more expensive than plain vanilla funds.

"It's become a very competitive space and it's hard to justify a premium on these products when they are becoming mainstream," she said.

There is still time to watch the Festival live - register at Sustainable Investment Festival 2021.

First published by our sister title Investment Week