ESG Fund Flows in the “COVID” Quarter

ESG flows in Q1 showed equal parts divergence and alignment with broader fund market flows that likely represent both the nascent nature of the ESG product space as well as the orientation of investors allocating into these funds.

Globally, total ESG inflows registered around $36B USD which was the least quarterly flow amount for over a year.  All things considered, that isn’t too bad given the events taking place in the markets in the first quarter.

The big winner for global ESG flows were equity products checking in at just shy of $20B in new money. This was about two-thirds of the ~$30B flows into equity funds in the record-breaking prior quarter and the second highest quarterly equity flow number in the past decade.  Similar to the broader funds market, flows into equity ESG funds continued on a fairly steady state trend from prior quarters, registering quarterly flows near record highs.  As investors in ESG funds tend to key more on values then valuations, they are less likely to be found pursing market timing agendas and trading across asset classes.

Similar again to the broader fund space, ESG funds saw flows into Money Market products in Q1 – however this was off the back of Q4 2019 which saw an ever so small outflows from these investor safety nets.  The behavior of ESG money market funds is somewhat erratic as they actually saw small outflows during the last market downdraft in Q4 2018 when one would expect money to pile in. It would appear they are being used more tactically for trading or parking as opposed to strategically for asset allocation purposes.

Activity in bond funds however showed a divergence from prior trends and the broader markets as a whole.  Non-ESG products saw an exodus out of bond funds in Q1, particularly in the US, while ESG bond funds went from a fairly steady and robust trend of quarter on quarter inflows to near zero flows activity in Q1 this year.  Nothing came in and, importantly, very little went out.

Collectively ESG investors showed a little more appetite for risk which means they basically stuck to their long-term allocation strategies. In the broader funds market, investors sold out of fixed income, held pat on equities and piled into money markets.  ESG displayed a muted version of all three of these trends by going flat in fixed income, tempering inflows into equities and revisiting money markets after a quarter of negligible flows.

For everyone wondering if ESG funds outperformed in the first quarter of 2020, it must be pointed out how difficult this comparison is when considering such a small universe of funds against the broader funds markets.  An additional consideration is the coinciding disruption in the oil markets impacting all manner of carbon intensive industries that many ESG funds tend to allocate away from.  In fact, the first part of the market selloff in carbon intensive industries was likely more tied to the oil markets gyrations and less about Covid, but the global pandemic impacts settled in more in the latter half of the month of March to seal the performance fate of these stocks.  All that said, the outperformance of global ESG funds vs the broader market was a little more than 1% on a net basis with about 54% of ESG funds outpacing their conventional funds peers.  Considering the massive differences in the number of non-ESG funds and the breadth of product types, this is apples to oranges at best, but worth keeping an eye on. A similar carve out of US ESG funds showed even less significant results.  Conventional funds had a much wider spread of returns and only trailed ESG themed funds by 10 basis points on a net performance basis.  We’ll revisit this comparison after another quarter or two to get a better picture if there is a relationship worthy of note there.