Sustainability-themed funds on rise

More new ESG funds are coming to the market, and a greater share are sustainable funds, according to Cerulli

The list of US mutual funds and ETFs with an ESG focus grew by 23% over a year as of the second quarter, reaching 813 products.

That trend is coupled with a greater market share for passively managed funds which, as of the end of June, accounted for 23%, up from 20% a year prior, according to a report Monday from Cerulli Associates. The pace of new ESG-themed ETFs coming to market fueled that, with launches outpacing those of mutual funds, the company found.

Of the products on the market as of June, about 24% were ESG-integration funds, 48% were negative-screen funds and 28% were sustainability-themed funds. By comparison, about 29% of the funds in 2020 were ESG integration, 49% negative screening and 22% sustainability themed.

Despite the growth in the number of products, total assets in US ESG ETFs and mutual funds are projected to be about $669bn by the end of 2022, which would be down 13% from the high of $768bn at the end of 2021, according to Cerulli. The drop would be due to negative returns, rather than sales, with net flows for the products at $5.8bn through the first half of the year. However, that is less than a tenth of the sales seen during the first six months of 2021, with more than $59bn flowing into the products.

Last year, by comparison, net sales were more than $94bn.

US ESG-themed funds could surpass total assets of $1trn in 2025, reaching an estimated $1.3trn by the end of 2027, the firm stated in the report. By then, 43% of estimated assets would be ETFs, up from less than 21% at the end of 2021.

The top areas for product development, by new funds that address environmental issues, are climate change (83%), pollution (60%) and clean water (60%), according to Cerulli. The top social issues covered by new funds are equal opportunity employment and diversity (37%), gender equality (37%), labor standards (33%) and housing (33%).