Investors flock to ESG passives in Q3

Some 96% of sustainable fund flows were into passive strategies, according to Morningstar

Passive funds accounted for almost the entirety of flows into European sustainable strategies in the third quarter of 2022, with one iShares strategy netting $5.3bn alone, according to data from Morningstar.

The latest Global Sustainable Fund Flows update from the data and ratings provider showed the European sustainable fund universe attracted $22.6bn in net inflows in the three-month period to end of September, significantly lower than the readjusted $33.4bn net inflows seen in the previous quarter.

However, against a backdrop of continued geopolitical concerns with the Russian invasion of Ukraine, high inflation, interest-rate hikes, and a looming global recession, sustainable funds were once again more resilient than the wider market – European conventional funds suffered $124bn of net outflows in comparison.

Passives were the biggest winners in Europe, with almost all – 96% – of the $22.6bn inflows landing in passive strategies. BlackRock’s iShares had four ETFs in the list of top 10 bestselling funds for Q3 with the iShares MSCI USA ESG Enhanced ETF raking in $5.3bn alone. BlackRock took in $7.6bn in ESG fund flows in Q3, followed by DWS and Amundi.

Sustainable equity and allocation funds suffered the most in Q3, said Morningstar, with half the previous quarter’s inflows. However, this still beats the “staggering outflows” of $70bn conventional equity funds endured. Union Investment and Royal London were among the bottom sustainable fund providers by flows shedding just under $1bn each.

Europe’s sustainable assets in Q3, however, were almost level with Q2’s figure at around $1.85trn – while Europe’s wider fund universe saw assets drop 10%. Nonetheless, the number of new sustainable funds hitting the shelves almost halved from 161 in Q2 to 82 in Q3.

Overall, sustainable funds still accounted for close to 18% of European fund assets at the end of September 2022, again level with the second quarter.

The report said: “We expect this percentage to rise in subsequent quarters as investors’ demand for strategies that align with their sustainability preferences continues to grow, prompting asset managers to launch additional sustainable products and repurpose existing conventional ones. The Mifid II amendment, which came into effect in August that requires financial advisers to consider their clients’ sustainability preferences, has the potential to accelerate adoption of sustainable investments among retail investors despite macro headwinds.”

Global

From a global perspective, the stats were very similar to Europe demonstrating the region’s lion’s share of the sustainable investment universe – some 82%. Global sustainable funds attracted $22.5bn of net new money in Q3, less than the revised $33.9bn of inflows in the second quarter.

Meanwhile, global sustainable fund assets slipped to $2.24trn at the end of September, from $2.28trn in June. Morningstar highlighted the 1.6% drop was less pronounced than the 7.5% decline for the broader market.

Product development also slowed in the more challenging market conditions with 148 new sustainable funds being brought to the market globally, with the number being around 240 in the previous quarter.

Hortense Bioy (pictured), global director of sustainability research at Morningstar and member of the ESG Clarity Committee, commented: “Sustainable funds are not immune to the global macro environment. Not only has it been a turbulent year for all investors, but a trying one also for sustainability-focused investors who’ve had to deal with being underweight in fossil fuel companies, greenwashing concerns, and growing politicisation of ESG in the US. So far this year, flows into sustainable funds have proven more resilient than those into traditional funds. Investors in sustainable strategies tend to focus on the long-term and are less inclined to pull their money out in jittery markets.”

US

Following its first quarter of outflows in more than five years, US sustainable funds were back in positive territory in Q3 with inflows of £439m. While a marked difference from the record flows of $21.6bn recorded in the first quarter of 2021, this was still a positive figure when compared with the wider market that saw outflows of $86bn for Q3.

Clean energy and clean technology funds were the main beneficiaries, with Invesco Solar ETF, the top-selling strategy, seeing inflows of $223m.

Passive funds were also popular with US investors, with sustainable index-based funds raking in $1.5bn – active sustainable lost more than $1bn during the third quarter.

The report noted: “Actively managed sustainable funds have endured a rough 2022, suffering outflows in four out of nine months so far. However, this pales in comparison to non-sustainable active funds, which have lost roughly $67bn each month (on average) so far this year.”

Nonetheless, in terms of product launches all but one of the 15 new funds brought to market were actively managed. On average over the past three years, active funds have accounted for 73% of US sustainable fund launches, but Q3’s 93% exceeded that trend.

In terms of AUM, Morningstar said the market depreciation and “tepid demand for sustainable funds” drove assets in these funds to $272bn, their lowest point since the first quarter of 2021.

Asia ex-Japan

Excluding China, the Asia ex-Japan region recorded net inflows of nearly $600m into sustainable funds during Q3, a drop from the $1.3bn in net inflows seen in Q2.

Taiwan continued to take the lion’s share of Asia’s flows with $856m over the third quarter. Singapore and Thailand saw negligible inflows while India and Hong Kong saw outflows of $59m and $24m respectively.

However, South Korea saw the largest outflows for the region at $177m with equity fund TIGER Innovator ESG30 and ARIRANG ESG Value Active accounting for $85m of flows heading for the exit.

Assets were roughly flat at $49bn with equity funds making up the bulk at 60%, while fixed income AUM continued to decline in the region representing just 5.4% of the overall figure at the end of September.

However, Morningstar described product development as “strong” in Q3 with 34 new sustainable fund launches in Asia ex Japan, including 24 in China, six in South Korea, three in Taiwan, and one in Malaysia.

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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...