Despite this year’s market volatility and falling security prices, investors have allocated new capital into sustainability funds while shunning broader-market investment vehicles.
Environmental, social and governance (ESG) mutual funds and ETFs lured a net USD 120 billion in the first half of 2022, according to Morningstar data. While that was about a third of the flows over the same period a year earlier, it compares with net outflows of USD 139 billion from broader-market funds this year.
Total assets invested in ESG funds still fell about 15% to USD 2.47 trillion through June 2022 from USD 2.89 trillion at the end of last year as markets dropped, according to Qontigo calculations based on Morningstar data. The STOXX® Global 1800 Index fell 22% in the first six months of this year.
“The drive for sustainability approaches is still taking precedence over more traditional strategies, as more institutional and retail investors adopt responsible strategies,” said Axel Lomholt, Chief Product Officer, Indices & Benchmarks at Qontigo. “We know by anecdotal evidence that capital is also flowing away from traditional funds into repurposed ESG funds. While sustainability funds are not immune to the broad negative market background, they have proven more resilient because of the structural shift in investor preferences.”
Many European asset managers have switched the strategy of established funds to make them compliant with the European Union (EU)’s Sustainable Finance Disclosure Regulation (SFDR) and to integrate clients’ sustainability preferences into the MiFID suitability assessment.
For example, Amundi has replaced the underlying index of a broad-market pan-European ETF with the STOXX® Europe 600 ESG Broad Market, which removes laggard companies in terms of ESG criteria.
The SFDR is one of three regulatory pillars in the EU’s Action Plan on sustainable finance, which aims to reorient capital towards more sustainable businesses and has been a driving force in reshaping financial market behavior across the globe.
Geographies
Europe accounted for almost the entirety of new assets invested in ESG funds this year. Investors transferred a net USD 109 billion to European ESG funds in the first six months of the year and invested only USD 9 billion in US-domiciled ESG funds.
Still, the USD 31 billion invested into European sustainable products in the second quarter was the lowest quarterly net purchase since COVID-19 struck in the first quarter of 2020, Morningstar said in a report.1
‘Stickier’
According to Hortense Bioy, Global Director of Sustainable Research at Morningstar, the particular profile of ESG investors stands out in times of market stress.
“Sustainable fund flows are 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,” Bioy said in an interview. “Essentially, ESG funds tend to be stickier than conventional funds.”
Active vs. Passive
More broadly, index equity funds had USD 311 billion of inflows during the first half of 2022, Morningstar said.2 Meanwhile, actively managed equity funds suffered USD 180 billion of outflows. As of June 30, index funds accounted for 48% of equity assets worldwide.
ETF flows data
Qontigo’s analysis of fund flows data shows investors’ choice of ESG strategies also manifested in the passive ETF space. Investors poured a net EUR 27.9 billion (USD 28.5 billion) into global ESG ETFs in the first half of 2022, or 8.5% of total assets managed in the category at the start of the year.
1 Morningstar, ‘Global Sustainable Fund Flows: Q2 2022 in Review,’ July 28, 2022.
2 Morningstar, ‘Global Flows H1 2022,’ July 22, 2022.