Sustainable funds across Europe saw inflows of €30bn in the first quarter of 2020, amid a period that saw some of the worst stock market falls in history and €148bn pulled from the overall European fund universe
Morningstar data shows sustainable funds demonstrated resilience throughout the covid-19 sell-off with limited outflows compared to the wider fund industry.
In January, sustainable funds saw €14bn of assets pile in, and in February inflows neared record highs of €18.5bn. However, in March, as the coronavirus pandemic spread around the world and the threat to human life came to the fore, sustainable funds saw €3.3bn of outflows. Nonetheless, this is a much smaller figure than the €245.5bn of outflows seen in traditional funds.
This led to an overall figure of €30bn inflows for sustainable funds for the first quarter, while the wider fund universe saw outflows of €148bn.
In addition, environment- and climate-aware funds dominated the leader board of the best-selling funds in the first quarter, with five such funds featuring in the top 10, seeing €3.5bn in combined flows.
Hortense Bioy, director of passive strategies and sustainability research, Europe, and editorial panellist for ESG Clarity, commented: “The continued inflows in first-quarter 2020 speak of the stickiness of ESG investments. Investors in sustainable funds are typically driven by their values, invest for the long term, and seem to be more willing to ride out periods of bad performance.”
Although assets in European sustainable funds also dropped in Q1, declining 10.6% from a record high of €694bn at the end of 2019 to €621bn, again this compares with much larger falls in the overall European fund universe which saw assets decrease by 16.2%.
Product development remained strong, Bioy added, with the launch of 72 new sustainable funds and the repurposing of 24 conventional funds. This brings the total European sustainable fund universe to 2,528 funds.
In terms of asset class, equity funds were the most popular with €16.1bn of fund flows, followed by Allocation funds with €7.6bn.
Morningstar’s Manager Research report also said active sustainable funds recorded a smaller drop in inflows than passive sustainable funds, the former declining by 26%, while the latter fell by 69%.
Despite this, assets continue to pile into passive products with trackers and ETFs dominating the top ten sustainable funds by flows.
BlackRock’s ACS World Low Carbon Equity Tracker Fund was the most popular sustainable mandate for the period with a remarkable €1.1bn inflows.
Bioy added: “We expect flows into climate-aware funds to continue their upward trajectory in the coming years, supported by significant regulatory developments, including the EU Action Plan on Sustainable Finance.”
Nigel Green, CEO and founder of financial consultancy deVere Group, the covid-19 pandemic will only further propel investor interest in ESG investing.
“There is a wider and growing force behind the rise of ESG investing,” he said.
“The current situation underscores that human health is reliant upon healthy ecosystems; that we need to ensure the sustainability of supply chains; and that those companies with robust corporate governance and good business practice fare better in difficult times and are ultimately best-positioned for the future.
“The collective wake-up call delivered by Covid-19 plus the search for profits in these highly unusual times are catapulting responsible, sustainable and impactful investing into the mainstream.”
Performance
Sustainable and ESG funds also showed resilience from a performance perspective throughout the coronavirus volatility with FE Analytics data compiled by Charles Stanley Direct. Although sustainable funds posted heavy losses, they were smaller losses than those seen across the wider industry.
SRI funds in the UK All Companies sector posted a loss of 21.8% over the three months to 20 April, compared to Non SRI UK All Companies funds which lost 25.6%. The FTSE All Share fell 24%.
From a global perspective, SRI Global funds dropped 10.8%. This is compared to falls of 13.7% in Non SRI Global fund and 13.5% from the MSCI World index.
Research conducted by Charles Stanley Direct also found that 48% of investors expect to increase their SRI/ESG exposure.
Rob Morgan, investment analyst at Charles Stanley Direct, said: “Recent market action appears to underscore the case for backing companies with strong ESG credentials, and fund managers are increasingly integrating some form of ESG research into their processes – even though it may not always be identified as a separate strand.
“As well as factors surrounding style and sector positioning, there is perhaps a broader reason for the generally superior returns. As society becomes more acutely aware of the need to solve environmental and social issues, companies that help us do so are well placed to grow. This could be from the opportunities that arise from the creation of a more sustainable and low-carbon economy, or from solving other pressing issues facing society.”
