ESG funds attract record inflows during crisis

Investors have injected record sums into sustainable investment funds during the coronavirus pandemic, providing a glimmer of hope to active managers battered by the relentless flight of capital into passive products.

Funds that invest according to environmental, social and governance principles attracted net inflows of $71.1bn globally between April and June this year, pushing assets under management in the products to a new high of just over $1tn, according to Morningstar.

Separate UK fund flow data from transaction network Calastone found that the amount of new money invested in ESG equity funds between April and July exceeded the combined flows for the previous five years.

Sustainable funds’ previous niche status means that their market share is still small relative to the $41tn held by all investment funds worldwide.

But growing public awareness of the climate crisis is turbocharging sales of ESG funds. The disruption caused by Covid-19 has accelerated the sector’s growth as investors look for sustainable business models that can withstand market shocks.

“From 2015 to 2017, little or no new money was invested in ESG funds,” said Edward Glyn, head of global markets at Calastone. “[But] real momentum has been building in the last two years in the appetite for investment products that align with savers’ ethical concerns.”

While he noted that investor demand for sustainable investing was on the rise before the pandemic, the crisis had “thrown further examples of corporate failure into sharp relief”.

Mr Glyn said that sustainable funds are “the one area of real strength for active equity funds”, which have been hit by large redemptions this year as the market turmoil led investors to hasten their shift into passive funds.

“[ESG] is great for the [fund] industry because it’s active money that comes with higher fees, plus it’s something that investors want,” he said.

Calastone’s flow figures cover a sample of mainly UK-based funds processed by the transaction network, but they are consistent with Morningstar’s wider analysis.

ESG fund flows represented almost a third of all European fund sales in the second quarter, while sustainable equity funds gathered 63 per cent more new money than traditional equity funds over the period, Morningstar said.

Calastone said that over the past year, sustainable funds accounted for one-third of flows into global equity funds processed on its platform, but that this proportion rose to more than half in June and July.

ESG funds’ low exposure to oil and gas helped them to outperform the wider stock market during the March coronavirus sell-off. But a recent study by Morningstar found that the majority of sustainable funds have beaten traditional funds even excluding 2020’s unusual market conditions.

The heightened interest in ESG has also led to a record number of sustainable funds launching in Europe this year, said Hortense Bioy of Morningstar. But in the wake of revelations that 20 sustainable funds invested in fast-fashion retailer Boohoo, which has been hit with allegations of poor working practices, she warned that the need for clear ESG standards had “never been so pressing”.