Sustainable fund flows slow but more resilient than wider market

Global sustainable funds attracted $22.5bn of net new money while wider market shed $198bn

The Asia ex-Japan region (excluding China) recorded net inflows of nearly $600m into sustainable funds during Q3, a drop from the $1.3bn in net inflows seen in Q2, according to Morningstar.

In its latest Global Sustainable Fund Flows update from the data and ratings provider, Morningstar said overall global sustainable funds in Q3 had once again held up well against a backdrop of continued geopolitical concerns with the Russian invasion of Ukraine, high inflation, interest rate hikes, and a looming global recession.

Global sustainable funds attracted $22.5bn of net new money in Q3, less than the revised $33.9bn of inflows in the second quarter. In comparison, the overall global fund universe suffered outflows of $198bn in the third quarter of 2022, after suffering $278bn of outflows in the second quarter.

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

Hortense Bioy (pictured), global director of sustainability research at Morningstar, 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.”

Asia ex-Japan and China

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.

Europe

Passives were the biggest winners in Europe, with nearly 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.

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 to the wider market that saw outflows of $86bn for Q3.

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

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.

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.

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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...