Global sustainable funds saw inflows of $32.6bn in Q2 this year – a decline on the first quarter, but stronger than the broader market, which saw outflows of $289bn, according to Morningstar.
The group’s Global Sustainable Fund Flows: Q2 2022 in Review also reported an uptick in product development with 245 new sustainable funds on the market as a result of launches and asset managers repurposing existing strategies.
Nonetheless, macroeconomic headwinds including inflationary pressures, rising interest rates, a global energy crisis and a looming global recession became more acute in the second quarter, said the report, resulting in lower flows and falling assets under management.
The global sustainable funds’ organic growth rate, calculated as net flows relative to total assets at the start of a period, declined to 1.3% in the second quarter down from roughly 3% in the first quarter. The global sustainable inflow of $32.6bn was markedly lower than Q1’s $87bn, with all regions seeing a slump.
Global sustainable fund assets slipped 13.3% to $2.5trn from $2.84trn at the end of the first quarter.
“This was the largest drop since the first quarter of 2020 and was roughly in line with the net asset base of a year ago. Nevertheless, sustainable fund assets held up better than the overall global fund market, which saw its assets shrink 14.6% in the three months through June 2022,” the update said.
Hortense Bioy, global director of sustainability research at Morningstar and ESG Clarity Committee member, remarked: “Amid investor concerns over a global recession, inflationary pressures, rising interest rates, and the conflict in Ukraine, sustainable funds net inflows plummeted in the second quarter, fared better than the broader market.
“Sustainable funds are essentially stickier.”
Excluding China where data was not available, the Asia ex-Japan region saw inflows of $929m into sustainable funds, a notch lower than the $1.3m recorded in Q1.
Taiwan was the highest in terms of fund flows with $911m followed by Hong Kong with $129m and Thailand with $0.8m. South Korea, India and Indonesia all saw net outflows over Q2.
Assets were recorded lower at $61bn sitting in sustainable funds, a 1.3% decrease since Q1.
The report added: “Taiwan and South Korea remained the two largest markets by asset size, accounting for 10.8% and 6.3% of the region’s assets, respectively. However, South Korea’s sustainable fund assets continued their tumble from last quarter, losing 18.7% in the second quarter, and a whopping 32.1% since they peaked at $5.6bn in the second quarter of 2021.”
In contrast to the other regions, product development slowed down. There were 16 fund launches mainly in China with these dominated by allocation and equity funds.
Retaining its lead, Europe continued to make up the lion’s share of the sustainable fund landscape with 82% of global sustainable fund assets. Inflows were 57% lower than the first quarter at $31bn, but European conventional funds suffered almost $100bn of net outflows.
“As demonstrated in the past two quarters, as well as in 2020 at the start of the Covid-19 pandemic, sustainable fund flows seem to be more resilient in times of market volatility than their traditional peers as ESG-focused investors – who are typically more values-driven and long-term-oriented – are slower to pull money from the funds they are invested in,” the report highlighted.
The best-selling fund in Europe was the BNP Paribas Easy JPM EMU Government Bond IG 3-5 Y ETF, which saw $1.5bn in net flows, while newcomer BlackRock ACS World ESG Equity Tracker also made the top sellers with $1.4bn in net flows.
Overall, sustainable funds accounted for more than 18% of European fund assets at the end of June 2022, up 1 percentage point quarter to quarter, the report said.
Morningstar stated the US “battled the bear” in the second quarter, with sustainable funds shedding $1.6bn – the first quarter of outflows in more than five years. However, flows into sustainable fixed income funds stayed positive, with active equity mandates bearing the brunt of the wider flows. The outflows from sustainable funds were also a drop in the ocean compared to the $150bn that exited the broader market.
“The US sustainable funds market sustained a higher organic growth rate than the overall US market,” the report added. “During the second quarter, the sustainable funds market shrunk by 0.45% (in terms of the organic growth rate), but the overall market shrunk by 0.74%. On an annual basis, the divergence grows larger; the sustainable funds market grew by 13.0%, and the total market grew more modestly by 1.4%. This continued growth even during a period of poor performance could signal that investor demand for sustainable funds is more “sticky” than broader US demand.”
The best-selling funds in the region were the iShares ESG Aware MSCI USA ETF and Invesco Floating Rate ESG with inflows of $477m and $381m respectively.
Assets in US sustainable funds dipped to $296bn due to market depreciation, but asset managers continued to expand their fund line-ups with 32 sustainable funds launched and four funds repurposed and renamed to adopt sustainable mandates over the three-month period.