Luxemburg-based ESG funds have rebounded more than 12 per cent in the last two years and it could be a sign of things to come for sustainable investments. Data from the Luxembourg Sustainable Finance Initiative showed 12.3 per cent growth in ESG assets under management in the European country from the second half of 2022 to June 2024. It comes as investor confidence in renewable energy and green technologies is reignited, despite plans from the incoming American President to double down on fossil fuels.

What is an ESG fund?

An ESG fund is an investment vehicle that incorporates environmental, social, and governance (ESG) criteria into its selection process. These funds are designed for investors who seek financial returns while supporting companies or projects that demonstrate responsible and sustainable practices.

Environmental considerations include a company’s efforts to address climate change, resource management, and energy efficiency. For instance, an ESG fund may prioritise businesses that actively reduce carbon emissions or invest in renewable energy. Social factors assess how companies manage relationships with employees, customers, and communities. This might involve ensuring fair labour practices, promoting diversity and inclusion, or contributing positively to societal well-being. Governance focuses on the ethical and transparent management of a company, such as maintaining accountable leadership, preventing corruption, and safeguarding shareholder rights.

ESG funds appeal to individuals who value aligning their investments with their personal or institutional values. These funds often exclude industries like tobacco, fossil fuels, or weapons while favouring companies with high ESG ratings. Though primarily aimed at fostering sustainable development, ESG funds also recognise the financial merits of investing in companies that effectively manage risks associated with environmental and social challenges.

The growing popularity of ESG funds reflects a broader trend in responsible investing, driven by heightened awareness of global issues and the understanding that sustainable business practices can enhance long-term profitability. Investors increasingly view ESG funds as a means to achieve financial goals while contributing positively to society and the planet.

ESG funds up in Luxembourg

ESG funds are experiencing strong growth in Luxembourg, newly released data shows, after retail investors contributed more than €12 billion to ESG funds in the country in the first half of 2024 alone. As Funds Europe reports:

“Retail investors played a key role in driving ESG fund inflows, contributing €12.6 billion in net flows to ESG Ucits funds during H1 2024. In contrast, institutional investors withdrew €7.8 billion.

The EU’s Sustainable Finance Disclosure Regulation (SFDR) framework remains pivotal, with 68 per cent of Luxembourg Ucits funds classified under Article 8, followed by Article 6 (27 per cent) and Article 9 (4 per cent).

“ESG private market funds achieved a compound annual growth rate of 95.2 per cent between 2019 and 2023. Private equity led the charge, accounting for €267.5 billion in assets under management, followed by infrastructure (€188.9 billion), real estate (€107.7 billion), and private debt (€58.7 billion).”

Investors hold out hope for American renewables

Across the pond, investors remain hopeful that ESG funds will continue to do well under a Trump presidency, despite the incoming administration’s plans to put an increased focus on extracting fossil fuels. Observers believe that although the President-Elect was a vocal critic of President Biden’s Inflation Reduction Act, which included massive green investment, it is unlikely to be repealed in whole or even in part.

A key reason for the staying power of America’s green infrastructure projects is that many of them are based in Republican states. That means wind farms in Nevada and solar farms in Texas are employing Trump voters to build, maintain and operate them. But it’s not just speculation, the data shows that recent gloom around the fate of ESGs may have been overstated. As the Financial Times reported:

“Two-thirds of large asset owners globally, including pension funds and sovereign wealth funds, told Morningstar that ESG had become more material to their investment decision-making over the past five years. And the percentage of those with more than half of their total assets reflecting ESG considerations has increased, from 29 per cent in 2022, when they were first asked, to 35 per cent in 2024.”

In June of this year, Investor’s Chronicle reported several ESGs were making a comeback, following a big sell-off in 2022. While ESGs by and large were not beating AI-fueled markets, a number were returning between 7 and 11 per cent ROI.

And this month it was revealed that ESG funds attracted more than $10 billion globally in Q3 2024. As The Morning Star reported:

“The global coverage of environmental, social, and governance open-end and exchange-traded funds attracted an estimated USD 10.4 billion of net new money in the third quarter of 2024, a notable uptick from the inflows of USD 6.3 billion in the second quarter and USD 4.8 billion in the first quarter. In Europe, flows into sustainable bond funds outstripped those into conventional bond funds.”

So, while an ESG fund might not always deliver the biggest ROI, many ESG funds are delivering strong results, and attracting growing contributions from investors.

Where next for ESG funds?

The rebounding of ESG funds could be a signal that renewable investments are starting to take off again amid shifting investor priorities and increasingly diversified energy grids the world over.

Luxembourg’s 12.3% growth in ESG assets under management from late 2022 to mid-2024 reflects a broader trend of retail investors driving net inflows, even as institutional players adjust their portfolios. Globally, ESG funds attracted over $10 billion in Q3 2024, marking a steady rise in investor interest and confidence despite economic uncertainties.

In the U.S., concerns over policy shifts under a Trump presidency may not undermine the momentum for green investments. Many renewable projects, often in Republican-led states, continue to enjoy bipartisan support due to their economic benefits. Additionally, the Inflation Reduction Act’s legacy, with its massive investments in green infrastructure, is expected to persist.

Emerging markets, particularly in the Asia-Pacific region, are further expanding the scope of ESG opportunities. This growth is driven by harmonised efforts between asset owners and managers, as well as innovative applications of private capital. ESG funds may have their moment as consumers begin to demand sustainable financial products and renewable technologies play a larger part in all of our lives.