Climate-focused funds see assets grow to record $408bn

High investor demand and regulatory pressures saw assets in climate-focused funds double to a record $408bn (£313bn) last year, according to a report from Morningstar.

The financial services firm – which identified 860 mutual funds and exchange-traded funds with a climate-related mandate at the end of last year – said that assets were boosted by an accelerated pace of product development.

Europe remains the largest and most diverse climate funds market, according to the report, accounting for more than three-quarters of global assets, with $325bn.

For the first time, China overtook the US as the second-largest climate funds market, more than doubling in size to about $47bn. Meanwhile, US climate fund assets grew by 45% to $31bn.

The report highlights how options for climate investors have expanded considerably in the past year, and will continue to grow as asset managers strive to help reorient capital towards more climate-friendly investments.

“As more asset managers commit to net zero by 2050 and start implementing their decarbonisation plans, we expect to see more new climate funds come to market,” the report states.

“We will also see more existing conventional and sustainable funds repurpose into fully fledged climate funds or tweak their investment objectives to include emission reduction targets.”

Morningstar divides global climate funds into five mutually-exclusive categories, which include: low carbon, climate conscious, green bonds, climate solutions, and clean energy and tech.

Climate solutions and climate conscious overtook clean energy and tech as the largest categories in 2021 as investors looked for investment opportunities beyond the renewable energy sector.

The report explains how low-carbon funds provide the greatest shield from carbon risk, but offer little in the way of climate solutions. Conversely, climate solutions and clean energy and tech funds offer high exposure to climate solutions, but can also currently carry high carbon risk.

Many of these funds invest in transitioning companies that operate in carbon-intensive sectors such as utilities, energy, and industrials, which are developing solutions to help reduce their own carbon emissions and that of others.

“When choosing a climate product, investors should carefully consider their green preferences and carbon-risk appetite,” the report states.

“As companies are being asked to disclose more fulsome and accurate data, we can expect funds with a climate-related mandate to become clearer in their missions and more accountable to investors.

“This report is a snapshot of the current state of play, but we expect this universe will fluctuate.”