Various factors, including regulation, returns, and millennials, will combine to ensure that the growing demand for Europe-domiciled energy transition funds persists, according to a recently published report.
The assets under management (AUM) of Europe-domiciled energy transition funds rose from €4.4 billion (US$5.2 billion) in 2016 to €50.7 billion in February 2021, according to Morningstar data. This equates to a compound annual growth rate of 63% over five years. The bulk of the growth in AUM took place in 2020, with assets increasing 437.8% year-on-year.
Energy transition funds target companies and technologies that enable a shift from fossil fuels to more sustainable forms of energy. Most portfolios, according to the report by Cerulli Associates, are diversified across geographies and across the range of specific activities, from energy generation to energy storage and sustainable transport.
Many funds focus on small- and mid-cap companies, believing that these offer significant innovation and potentially higher returns than larger companies. The portfolios of energy transition and net-zero funds are diverse. Some focus on specific fields, such as semiconductor and electronics companies that specialize in energy efficiency.
The increased demand for energy transition funds in 2020, the report states, can be attributed partly to the products’ strong returns. Another factor is a shift in the economics of renewable energy, which has become cost competitive with fossil fuel energy.
Public policy and regulation have emerged as the biggest factors driving the net-zero and energy transition trend. The EU is committed to achieving net-zero carbon emissions by 2050 and in December last year it set a binding target to cut greenhouse gas emissions by 55% by 2030 compared to their level in 1990.
Underpinning these commitments is the EU’s Sustainable Finance Directive Regulations (SFDR), implemented on March 10 of this year. SFDR introduces new environmental disclosure requirements for investible companies and funds. In this regard, generalized claims of “sustainability” or “green” credentials will be subject to explicit and detailed disclosure and funds will be placed in different categories depending on their credentials.
The UK is also moving to the same direct. In November 2020, the UK government set out a path toward mandatory climate-related disclosures, which will cover all UK-authorized asset managers by 2023. The UK’s proposals make full disclosures a legal requirement, whereas the EU plans operate on a “comply or explain” basis.
“These trends have made energy transition funds resilient through the Covid-19 crisis,” says Fabrizio Zumbo, associate director, European asset and wealth management research at Cerulli Associates. “In fact, the coronavirus outbreak may even prove to be a further driver for energy transition, given that many governments’ stated plans for post-pandemic economic recovery have a strong environmental dimension.”