Impact funds see slowdown in momentum

A new report has found that while impact funds accounted for 18% of net assets in European sustainable funds by the end of 2023, the sector is not immune to global headwinds. 

The growth of impact funds has been substantial over the past few years, but a new report from the Association of the Luxembourg Fund Industry (ALFI) suggests a slowdown in momentum.

The report, which examined the European sustainable fund landscape, found that total net assets of impact funds in Europe grew from €142bn in 2019, to €418bn by the end of 2023. Impact funds – which the report describes as those with a thematic focus on “various sustainability themes” as well as article 9 funds – accounted for 18% of net assets in sustainable funds by the end of 2023. 

Between 2020 and 2023, between 130 to 230 new impact funds were launched each year.  However, the last two years have seen a decline in net assets, with a “slight contraction” of 2.2% year on year in 2023, according to ALFI.

2023 also saw a slow down in demand for existing impact strategies, with European funds seeing €5bn in net outflows, and net inflows into impact funds totalling just €1bn, a stark comparison compared to the €122bn recorded at their 2021 peak. 

Contributing factors

Market volatility, rising interest rates, and evolving regulatory frameworks were flagged as some of the attributing factors which have influenced investor sentiment toward sustainable investments more broadly.

Despite the recent slowdown, Europe remains the dominant force in sustainable investing, holding 85% of global sustainable net assets, amounting to €2.2trn by the end of 2023. The number of investment managers active in the impact fund space more than doubled, from 171 in 2019 to 360 in 2023, according to ALFI.

The report also found that Luxembourg dominates the impact fund landscape, as funds domiciled in the country accounted for 59% of net assets at the end of 2023. 

Ireland follows with 12%, and France with 9%. Although impact funds domiciled in the United Kingdom hold just 3% of net assets, the country saw a notable growth of 34.4% in 2023, albeit starting from a smaller base. The Netherlands, with 3% of net assets, is also a key domicile, though it experienced a negative growth rate of 10.1% in 2023.