With the UK investment industry about to roll out the Sustainability Disclosure Requirements (SDR), it seems an opportune time to look at the country’s “green” fund landscape. After considerable dialogue between regulator and industry, fund management companies can start using SDR labels from 31 July.
This should assist transparency and investor choice in the often opaque world of sustainable funds. After all, it’s a lot easier to monitor outcomes when all providers are at last singing from the same hymn sheet.
Long seen as the terrain of the institutional investor, sustainability is increasingly a retail interest. In 2012, institutional investors held 89% of sustainable assets, compared with just 11% held by retail investors. By 2018, the retail portion had grown to one quarter, according to the Global Sustainable Investment Alliance. And, while ESG has become something of a political football, this doesn’t seem to have negatively impacted the adoption of sustainable investing within the UK market (see chart 1).
Chart 1: UK sustainable fund market AUM (£bn), 2014 to year to date
Source: LSEG Lipper
Note: This uses a relatively tight universe of sustainable funds, defined as all SFDR Article 9 funds plus Lipper Responsible Investment Attribute funds reduced to those containing indicative sustainable keywords in the fund name.
Over this period, the percentage of sustainable assets has risen from fluctuating between 2.5% and 3% from 2014 to 2018, from whence it gathered momentum, reaching 10.76% by April 2024. Some 71.9% of this is in equity funds. This is perhaps counterintuitive, as the “doldrums period” is slap-bang in the middle of when there was deemed to be an “ESG premium”—although what drove that, other than specific factor exposures, is open to question. We see sustainable assets accelerate towards the end of this period and, importantly, into the past few years, when sustainable equity funds in particular have generally underperformed their conventional peers.
That persistence of sustainable flows has been the case into 2024. Despite negative flows for equities overall (-£1.17bn), sustainable equity funds took in £6.1bn over the first quarter—making it the most successful “green” asset class. This was followed by bonds, where sustainable funds netted £1.91bn compared to £2.64bn for conventional bond funds.
Chart 2: Asset Class Flows, ESG v Conventional, Q1 2024 (£bn)
Source: LSEG Lipper
The rotation to sustainable from conventional equity has been embedded for some time, but there’s now also a definite shift taking place in sustainable bond fund markets. Contrast the take of sustainable bond flows as a percentage of the whole over FY 2023 (28.1%) with the same for Q1 2024 (41.9% [chart 3]). This tallies with other indicators of investor sentiment. According to FTSE Russell’s 2023 Sustainable Investment Asset Owner Report, “an equal number (73%) of asset owners are implementing passive and active sustainable investment strategies, further highlighting the mainstream characteristics of sustainable investment being part of the flight to passive investment strategies”.
In November 2022, when sustainable bond funds were losing assets hand over fist, I pondered as to whether “these strategies have been a victim of the dearth of ethical fixed income passive funds, which represents an opportunity for those able to address the demand”.
Six out of the top-10 bond money takers for the quarter are index trackers, netting £1.74bn between them. In total, index-tracking sustainable bond funds took 61.36% of sustainable bond flows over the quarter. Is this because of a broadening of sustainable passive bond fund offerings? Of the 542 share classes that saw flows over Q1, 107 were launched in 2023 or 2024. However, less than a quarter of those were passive vehicles (24). So, while new issuance is likely part of the answer, it doesn’t look like it’s all of it—or even likely to be the main driving factor.
That said, it’s still these asset classes making all the running in sustainable markets: all other sustainable asset classes were in negative territory over Q124, albeit relatively modestly: alternatives (-£24m), mixed-assets (-£151m), money market (-£205m), and real estate (-£2m).
Chart 3: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, Q1 2024 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
The changes have also been rung in terms of best-selling classifications between 2023 and Q1 this year. The top three last year were, in order: Equity Global, Equity US, and Equity Emerging Markets Global. Equity Global flows have moved to the red (see chart 3). The three top sellers are Equity US (£5.8bn/£1.45bn conventional), Bond Global Corporates LC (£706m/£2.07bn), and Equity Europe ex UK (£577m/£94m). This reflects a similar rotation from broad-based global equity allocations to a more specific focus on the US: while the Magnificent Seven narrative may be chipping at the edges, investors in general seem to be backing it more strongly than ever.
Four classifications see positive sustainable flows alongside negative conventional ones, most notably Equity UK (£295m/-£15.04bn). While the largest seller is a passive product, most of the others in positive territory are active funds. That’s an interesting development, as the UK equity market has long been unloved—especially by UK investors. One swallow doesn’t make a summer, and I’m wary of reading too much in to one quarter’s results, but perhaps we’re starting to see sustainable UK equity funds make a showing. The global equity rally faltered in April, and the UK market outperformed, so it’ll be worth seeing how the domestic sustainable equity market performs should this pattern persist.
It’s notable that there are no mixed-assets classifications on chart 3. Balanced, Conservative, and Flexible are generally out of favour, although conventional Aggressive sees significant inflows. Nevertheless, this hasn’t translated into sustainable flows for the classification, which saw outflows of £22m over the quarter. As we’ve noted before, this would indicate that investors continue to tread cautiously around sustainable offerings in this space.
Overall, despite reports of ESG’s death, this is still a growing proportion of the asset mix in the UK. What’s more, this summer’s roll out of SDR will likely add impetus to this, particularly for retail investors.
This article first appeared in the summer issue of Personal Finance Professional.
LSEG Lipper delivers data on more than 380,000 collective investments in 113 countries. Find out more.
The views expressed are the views of the author and not necessarily those of LSEG Lipper. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. LSEG Lipper cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.
