ESG May Well Have Entered its Maintenance Phase

Investors may have entered a new phase in their relationship with sustainable funds, but what does the data show? James Gard investigates

James Gard 11 October, 2023 | 8:47AM
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Sustainable investing has been around for over two decades, but has only recently entered the mainstream. In the UK, the pandemic triggered a wave of new fund launches, marketing initiatives and thinkpieces from fund managers about how sustainablility has always informed their decision making. Helpfully, returns from these funds were strong as the virtuous cycle of investing kicked in; money flowed into sustainable funds, whose stocks were re-rated higher as fund managers bought them up, and more money poured in.

This was a win-win.

But as the world gets distracted by war in Europe and now in the Middle East, and governments start to think about the practicalities of implementing Net Zero, there's a vague sense that the early enthusiasm is starting to flag.

AI is the next shiny new thing to attract investor euphoria. We’ve covered this cycle before as part of our coverage of thematic funds. Fund themes rise and fall, get left behind and re-emerge in different guises. Longevity is the ultimate goal of fund managers – they want products not just survive over five-, 10- and even 20-year periods, to build up consistent track records over time. While "saving the planet" is a noble aim, there's no reason sustainable funds shouldn't be spared the same creative destruction of any other marketable financial instrument. A fund has to make money (ideally more than the benchmark), and fulfil its stated aims. Bad funds will fail whatever the good intentions and marketing puff.

What Does The Data Say?

Data is always the first destination for Morningstar and the numbers tell the story that sustainable investing remains on track. Let's start with flows, a key indicator of investor sentiment in that it aggregates professional and retail money.

While the pace of growth may be slowing, the money is still coming in. Our latest data for Q2 shows European sustainable funds garnered $20 billion (£16.3 billion) of net new money in Q2 2023, down from nearly $34 billion in Q1. Europe accounts for the majority of these inflows and makes up 84% of the world’s sustainable assets.

US, Japanese and Australasian funds saw outflows, so there are significant regional differences (the ESG backlash underway in the US is out of the scope of this article, but does have an impact on global trends). Overall, global sustainable fund assets hit nearly $2.8 trillion at the end of June, helped by rising prices even as flows tailed off.

This figure has been higher in the last few years; in Q4 2021, total assets were just below $3 trillion. But this figure was less than $1.5 trillion just three years ago. Momentum may be flagging but the trend line is hard to argue with. Still, the Morningstar Global Sustainable Fund Flows report notes a significant slowdown in new product launches in Europe.

Rather than apathy or hostility, perhaps investors are becoming more demanding of the funds they buy – and the asset management industry, ever alert to shifting consumer preferences, has responded. It may not be enough in late 2023 for a fund manager to garner any interest by launching a generic "sustainable" product; certainly it will be hard to get the trade press to write about it with any enthusiasm. The term now seems too vague – and to borrow Benjamin Graham's phrase, the "intelligent investor" will want to ask more questions before they part with their money.

To that end, investors want to know what precise impact their fund is making on society, the environment and the wider world. How are investee company employees treated? Where does the company invest globally? My own investing principles are typically mixed; I’m high- minded about certain things but pragmatic about others. A vanilla sustainable fund isn't going to align neatly with this mish-mash of ideals, loose thoughts and biases. Sometimes investors want to just hand their money over to the experts and hope they know what they're doing. That may not be enough for the investors of the future.

Away from "impact", "climate" funds seem to be the new growth area, certainly in Europe.  A September report from Morningstar, Investing in Time of Climate Change, backs this up. As of June 2023, there were more than 1,400 open-end and exchange-traded funds with a climate-related mandate, compared with fewer than 200 in 2018. Passive fund providers are also starting to gain traction in this area and attract significant flows.

What's the View from the Industry?

Of course, data tells one story but professionals are best placed to know what's really going on at the sharp end; after all, they have to speak to clients daily about how their money is being managed. I asked the question about ESG fatigue to Yolanda Courtines, manager of the Bronze-rated Wellington Global Stewards. She says we've entered a new phase of ESG scrutiny. What matters now is authenticity.

Some companies are a "little misguided in wanting to prove that they're doing everything for everyone," she says.

"I think strong sustainability is about trade-offs. It's about making really difficult decisions and finding that balance that will ultimately protect all stakeholders over the long term," she says.

"So, I think it comes back to just finding that authenticity. I think we're past that first stage of transparency. We're moving into more ambition. And our role as portfolio managers is to think about the credibility and understand who is being credible in that journey."

I pitched the same question to William Bryant, who leads the advisory team at North Peak Advisory. He considers that there may have been some "overpromising" from the industry, but ultimately "you need to be able to deliver".  

Some of the backlash over ESG has been framed as an attempt by big finance to impose its worldview on politicians and the investing public. The perception has been that "ESG is the implementation of values on investing", but ESG data is there to inform valuation and risk.

"For most managers, it's not about values, it’s about understanding value," he says. And terminology is important; instead of "ESG investing" and its lexicon of "engagement", "divestment" and "inclusion", he prefers "responsible investment" as a wider category.

"How you talk about things is very important," he says, referring to the current ideological divide in the US.

The so-called "maintenance phase" may be a phrase more relevant to gym-goers and even addicts in recovery, but it's also relevant here, then. It refers to the period when the easy gains have been made (it's also the name of an excellent podcast on the follies of the wellness industry).

Maybe sustainability is entering its own maintenance phase. The fun bit is over ("make money and save the planet") leaving a trail of questions about our own follies and limitations. We've made a good start but the hard slog starts here. The climate change transition is of course bigger than any marketing spend. It’s both a theme and the theme of the coming decades. Just don't expect asset managers to stop launching funds!

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for


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