November 4, 2019

Monday Morning Memo: Is the growth in ESG funds real?

by Detlef Glow.

By following the news about product releases and trends, it is clear that sustainable investing is one of the hot topics in the European fund industry since there are new fund launches literally every day. Also, the assets under management seem to grow constantly on an above average pace since years. But do these statistics indicate real, sustainable growth, or are they misleading?

Looking at the number of fund launches, you can see that it is not only fund launches driving the news with regard to environmental, social and governance (ESG) investing. Some fund managers started to integrate ESG criteria into the portfolio management processes of their whole product ranges and claim that all the respective assets under management can now be considered as sustainable. Other fund managers relabel only one, or a few, of their existing products as ESG funds. Even as these types of fund promoter activities are not bad or wrong at all, they may have a massive impact on statistics with regard to ESG investing and respective media coverage.

If a conventional fund gets converted into an ESG fund, its assets under management would immediately pop up in the respective fund market statistics and drive the assets under management. This would also drive the growth rate up even though there have been no actual flows into the fund and none of the existing investors have been asked whether they want to invest with an ESG approach. Therefore, one needs to be careful when looking at statistics on the growth of assets under management of sustainable investment funds.

To validate the growth of a given product category, it can help to analyze the estimated net inflows in conjunction with the growth in assets under management. Even as this approach is not perfect either, it can be used to determine the main drivers of the growth in a given fund segment, as the growth is the sum of the net flows and the performance of the underlying markets. That said, this approach does not help to identify the growth coming from relabeled funds. It can, however, at least point to the fact that there must be an additional driver behind the growth in a given market segment if the growth rate, after deducting net sales, exceeds the increase of the underlying markets.

Taking these points into consideration, it can be said that the current growth of sustainable investments in Europe seems to be real from our perspective because we have witnessed an above average increase of assets under management driven by market performance. Additionally, a high percentage of the overall net inflows in the European fund industry are invested in mutual funds and ETFs with a sustainable investment approach.

The views expressed are the views of the author, not necessarily those of Lipper or Refinitiv.

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