Against All Odds, It’s a Boom Economy for Sustainable Investing

In a troubled economy, a continuing bright spot continues to be growing interest in sustainable investing with a lens on environmental, social and governance (ESG) issues. Global financial services firm Morningstar’s latest Global Sustainable Fund Flows Report shows that sustainable funds rebounded strongly after the initial pandemic-induced market sell-off.

It’s a bleak economy, but sustainable investing is on the rise

Global inflows into sustainable funds were up 72 percent in the second quarter of 2020 to $71.1 billion, according to Morningstar. The U.S. accounted for almost 15 percent of the global inflows, and Europe continued to dominate the space with approximately 85 percent. This follows trends from 2019, indicating it may be time to stop debating over whether sustainable investing is mainstream.

As TriplePundit reported recently, ESG investing appears pandemic-proof. That is an encouraging sign for companies that have not wavered in their commitment to sustainability despite the economic toll of the pandemic. The record inflows reported by Morningstar in sustainable investing are clear evidence of a global trend that won’t let up. The strong performance of the market’s first racial equity fund, launched two years ago, backs up that contention.

The Global Sustainable Fund Flows Report examined the global fund flows of 3,432 sustainable open-end funds and exchange-traded funds (ETFs) in the second quarter of 2020. Sustainable fund flows in the U.S. continued at a record pace in the second quarter of 2020, with estimated net flows of $10.4 billion. That nearly matched first-quarter flows and brought the total for the first half of the year to $20.9 billion—just shy of the annual record of $21.4 billion in sustainable fund net flows set in 2019.

The year-to-year performance of ESG funds encourages investors

“It won't take much in the way of additional ESG fund flows to set a calendar-year record for the fifth consecutive year,” writes Jon Hale, Morningstar’s director of ESG Research for the Americas. “Sustainable funds continue to perform well relative to conventional funds in a year of great uncertainty caused by the pandemic and other issues like the movement for racial justice and the upcoming election. These issues have underscored the need for investors to consider ESG-related risks in their portfolios and have affirmed the value of sustainability within the mainstream of investing.”

In the largest monthly flow ever recorded for sustainable funds in the U.S., investors poured $5.8 billion into sustainable funds and almost all of it to equity funds, according to Morningstar. The financial firm expects a record number of new sustainable fund launches in the U.S. this year. In the first half of 2020, 21 new funds launched, and three ETFs repurposed into ESG-focused strategies. These new offerings bring the total number of sustainable open-end funds and ETFs domiciled in the U.S. to 315, up from 309 at the end of the first quarter.

Assets in sustainable funds hit a record high of close to $1.1 trillion as of the end of June, up 23 percent from the previous quarter. Asset managers also continued to repurpose and rebrand conventional products into sustainable funds, according to Morningstar, with 40 such funds in Europe and three in the U.S.

The boost in ESG investing correlates with corporate disclosures

In response to investor pressure and hunger for solid data to evaluate companies on ESG parameters, there has been a dramatic shift in corporate sustainability disclosures. The recent responses made in kind by asset management firms including BlackRock have added to this change in the investing world.

Stakeholders like NGOs, activists and civil society groups are adding to the pressure cooker, increasingly targeting investors as a strategy for broad-based change and activist investors can get results, as 3p has regularly covered. According to the Boston Consulting Group, these groups are now better equipped to track companies’ social and environmental impact, and through the actions they take in response, influence corporate behavior. With momentum building to end corporate funding of police foundations, among other items on activists’ wish list, you can be sure sustainable investors are paying attention.

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