Fitch: ‘Seismic shift’ towards ESG funds in coming years

Fitch Ratings has predicted a surge in inflows into ESG funds, particularly in the alternatives space

Fitch Ratings has predicted a surge in inflows into ESG funds, particularly in the alternatives space, even as investment managers may be forced to delay fund launches or fund raisings plans as a result of the covid-19 pandemic

The New York-based firm said the coronavirus may further fuel assets into ESG products, despite already seeing record levels of inflows in recent years, as investing sustainably is supported by “increased pressure on governments to correlate stimulus aid to emission controls, evolving consumer behaviour and the attitudes of younger generations”.

In a note, Fitch also said both traditional and alternative investment managers with “credible” ESG teams, processes and systems in place could have a “competitive advantage” in attracting flows given the “seismic shift” in investor attitudes.

“ESG offerings related to public equities, and to a lesser extent fixed income, have experienced widespread client mandates and record levels of inflows, which will be a catalyst for increased product offerings by global IMs in coming years,” the note said.

It highlighted flows into sustainable funds in the US totalled $21.4bn in 2019, a nearly fourfold increase over the previous year, according to Morningstar data. As at 31 December 2019, there were 564 traditional funds with $933bn in collective assets under management with ESG considerations in prospectus language, up from 81 funds in 2018.

However, Fitch said traditional investment managers are further along the asset gathering spectrum than alternative strategies but added many in Fitch’s rated alternative IM universe are “launching funds dedicated to ESG strategies, building teams and implementing ESG principles across the investment process”.

Although Fitch highlighted the upside potential for these firms to incorporate ESG, it also warned of the “long-term damage” of “greenwashing” or overstating ESG credentials.

It also warned: “Targeted ESG initiatives can also be in conflict with alternative IMs’ broader portfolios, which often contain meaningful oil and gas exposure. Investments that are not aligned with stated ESG strategies across platforms could see increased investor scrutiny, although investors are likely to grant ample time for portfolio transition, given select LPs’ goals to transition their own investment portfolios to become carbon neutral by 2050,” the note said.

It added public equity and fixed-income ESG index funds have only delivered “modest outperformance”, which has been largely attributable to the underperformance of energy investments in recent years.

“If ESG funds are unable to deliver returns and/or portfolio attributes consistent with investor expectations over a longer period, this could lead to a reversal of asset flows, while creating reputational and/or legal challenges for fund managers.”

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...