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Despite the continued growth and increasing specialization of the ESG value proposition in Europe in recent years, at the end of 2021, the majority of responsible investment assets were held in equity products. However, major work is underway in areas such as fixed income, real estate, and private markets.

"The gap between the volume of assets in equity and other ESG products will continue to narrow as managers find new ways to implement ESG considerations in fixed income. The increased availability of green bonds indices has contributed to growth in the market," notes Fabrizio Zumbo, director, European asset and wealth management research at Cerulli Associates.

In 2021, a number of asset managers switched their funds' indices to ESG equivalents and more will follow suit, says Cerulli. European issuance of sustainable bonds and loans rose 89% in 2021, almost doubling from €396.4 billion (US$432.7 billion) in 2020 to €749.8 billion last year, according to the Association for Financial Markets in Europe. This represented 20.2% of total European bond issuance during the year, up from 9.3% in 2020.

"Interest in the sustainable credit market has also been supported by increased product development activity across Europe by asset managers and exchange-traded fund (ETF) issuers operating in the region," says Zumbo.

Managers across Europe have modified and added to their fixed-income ESG product suites in response to growing external pressure to invest responsibly and rising demand from European investors. Over 35% of the European bond fund universe-comprising mutual funds and ETFs-was categorized as Article 8 or Article 9 under the EU's Sustainable Finance Disclosure Regulation at the end of February 2022.1 Slightly over one-third were classified as the former, with just 2.3% of overall fixed-income fund assets under management in Europe sitting in Article 9 products.

ESG investing, especially in sovereign bonds, brings additional challenges. Managers typically adopt frameworks to exclude countries whose political and civil systems are not conducive to sustainable growth, often screening out poorer nations. Such activity runs the risk of creating a greater divergence between developed and developing nations. Supranationals therefore have a critical role to play in the development of ESG debt markets to support positive impact projects, particularly in developing countries. Europe is already heavily involved in green bond activity. The EU issued its first green bond last year, raising €12 billion. Activity in individual member states preceded this, with France issuing its first sovereign green bonds in 2017 and Norway doing the same more than a decade ago. Poland launched its first green bonds in 2019, followed by Hungary in 2020 and Serbia in 2021.