Sustainable Assets are Teetering on the $4 Trillion Mark

Despite a slowing in the third quarter of this year, sustainable funds are still proliferating as fund houses pivot to accommodate the EU's disclosure rules and continued investor demand

Ollie Smith 1 November, 2021 | 2:58PM
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Dripping water

As the COP26 conference kicks off in Glasgow and UK prime minister Boris Johnson declares it is ‘one minute to midnight’ for the climate, Morningstar research shows the impact of new European disclosure rules on sustainable fund flows.

After being nudged by the European Union, fund companies are now keen to incorporate environmental, social and governance (ESG) language into their fund prospectuses, resulting in a marked increase in the number of products included in Morningstar’s universe of sustainable funds.

Global sustainable fund assets almost doubled in the past six months to reach $3.9 trillion at the end of September 2021, Morningstar figures show.

Sustainable funds have achieved this despite a more recent slowing in flow activity in the third quarter of 2021. The global sustainable universe attracted $134 billion in net inflows in the third quarter, a pacier rate of change than in 2020’s third quarter, but down 15% from revised figures for the second quarter of 2021 of $158 billion.

“The slowdown in sustainable net flows was driven by Europe and the United States,” says Hortense Bioy, Morningstar’s director of sustainability research.

“Both saw their sustainable inflows decline by 17.6% and 12.2%, respectively, to $108.7 billion and $15.7 billion, respectively, whereas Japan and Asia ex-Japan made up for their disappointing second-quarter flows and registered a third quarter growth of 30% and 158%, respectively.”

Global Sustainable Fund Flows Q3 2021

The popularity of sustainable funds is a trend seen in the UK fund flows too. Last month, seven of the 10 most popular funds by flows were vehicles with a sustainable mandate, by far the most popular investment area.

Inflows into passive ESG funds continue to grow. In the third quarter, $26.7 billion flowed into passive strategies, a 9% increase on 2021’s second quarter. Active strategies still take the lion’s share of investor cash, by quite some considerable margin.

Those a slowdown of sorts has occurred in Europe, product innovation has remained strong. Across the world, there were 270 new sustainable fund launches in the third quarter of 2021. That is down from a readjusted figure of 308 in the second quarter, but ahead of the 223 new inceptions of the first quarter.

The bulk (63%) of new launches in the third quarter took place in Europe, where funds were repurposed and relaunched. In the third quarter of 2021, four equity and two fixed-income funds were repurposed to adopt sustainable mandates. The largest was JP Morgan’s $318 million Small Cap Sustainable Leaders, which has pivoted to the search for companies demonstrating leadership in the switch to sustainability.

Quarterly Global Sustainable Fund Flows

The US, meanwhile, witnessed a record number of new sustainable launches. Asia ex-Japan was not far behind with 32. New offerings and repurposed funds brought the total number of sustainable open-ended and exchange-traded funds in the US to 484 at the end of the quarter.

And, speaking of the US, the top fund house collecting sustainable cash for its sustainable fund offerings was BlackRock, which captured $11.7 billion in the third quarter, some way ahead of Amundi ($8 billion), and Swisscanto ($4 billion), whose corporate responsible bond fund was the global top sustainable fund for flows in that period, with more than $1.8 billion.

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Ollie Smith  is editor of Morningstar UK