- Asset Class: Most sustainable asset classes were in the black—with equities taking £10.28bn—except bonds, which saw outflows of £653m.
- Classification: Equity Global funds were the most popular sustainable classification, netting £4.57bn, followed by US and emerging market equity.
- Active v Passive: Despite more than £10bn of inflows for passive bonds over H1, passive sustainable funds shed £416m.
- Fund manager: BlackRock saw inflows of £6.64bn, overwhelmingly to equity funds.
Note that this report has narrowed its focus from broad ESG funds—those which indicate some form of ESG strategy in their fund documentation—to a smaller set 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.
Sustainable versus Conventional Flows
by Asset Class
Chart 1: Asset Class Flows, ESG v Conventional, H1 2023 (£bn)
Source: LSEG Lipper
It’s clearly all about equities for the first half of 2023, as sustainable funds in the asset class took in £10.28bn, as their conventional peers shed £20.31bn. Other sustainable asset classes that bucked the trend of their conventional equivalents were: alternatives (£30m versus -£1.77bn for conventional funds); money market (£1.23bn versus
-£43.25bn), and real estate (£121m versus -£1.03bn).
While sustainable mixed asset funds were in the black to the tune of £234m, they trailed well behind their conventional peers, which attracted £6.58bn—a phenomenon we’ve looked at in more detail here.
What’s surprising is the trend in bond flows. While these have been strong for the year to date, netting £9.51bn, sustainable bonds have seen outflows of £653m. Investors are clamouring for fixed income but, for whatever reason, that enthusiasm doesn’t extend to sustainable funds.
Excluding money market vehicles, sustainable funds took £10.01bn for the first half of the year, while conventional funds saw outflows of £6.37bn.
Sustainable versus Conventional Flows
by Classification
Chart 2: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, H1 2023 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
The three top-selling sustainable classifications for H123 are the same as in Q123: Equity Global (£4.57bn), Equity US (£2.68bn) and Equity Emerging Markets Global £899m. Conventional Equity US funds saw redemptions of £5.85bn over the period.
Positive flows for fifth-paced Equity China are noteworthy (£477m), given the overall negative sentiment for the country, as evidenced by the demand for emerging market and regional funds ex-China at this time. These flows are largely attributable to one fund, but it will be interesting to see if this becomes a discernible trend.
Sustainable Mixed Asset GBP Aggressive attracted £395m, although this is but a fraction of the £8.78bn that conventional funds in the classification pulled in.
Lastly, it’s unusual to see three money market classifications in the top 10—normally it’s only GBP funds that make a dent in the UK market, but sterling, euro and US dollar together netted £1.23bn (please note that we have also removed the £4.06bn outflows from Money Market GBP on the chart, for readability).
Chart 3: Largest Negative Sustainable Flows by LSEG Lipper Global Classification, H1 2023 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
As was the case in Q1, sustainable Bond GBP funds saw the largest outflows, at £616m—higher, but in the same direction as their conventional equivalents, at £43m.
In a rare ray of sunshine for Equity UK, sustainable funds in the classification rebounded from languishing with the second-largest outflows, as was the case in Q1, to see £31m of inflows over the half year, despite their conventional peers losing £7.39bn.
What’s of note is that seven of the 10 the classifications on Chart 3—all of which are bond classifications—see sustainable outflows where their conventional equivalents are in the black: something that’s relatively novel, and particularly apparent with USD fixed income: Bond USD Corporates, Bond Global USD and Bond USD High Yield together shed £148m while their conventional peers saw inflows of £2.82bn. However, the number of sustainable funds in these sectors tends to be relatively modest, and total outflows recorded in this table sum to £1.63bn, as opposed to the £11.01bn inflows in chart 2. Nonetheless, H1 flows exhibit a clear trend away from sustainable bond funds, in stark contrast to the fortunes of their conventional peers.
Chart 4: Sustainable Active v Passive Asset Class Flows, H1 2023 (£bn)
Source: LSEG Lipper
This maybe the dullest looking chart in the report—only two bars for your money—but is possibly the most interesting narrative. We’ve previously speculated that the paucity of bond ESG flows was down to the fact that passive funds are taking all of the fixed income pie, and sustainable funds suffer from being mainly actively managed vehicles. Mainly, but not exclusively. UK investors have pushed more than £10bn at bond trackers in the first half of the year. In that time, passive sustainable bond funds have shed £416m (£248m from mutual funds and £168m from ETFs). There’s clearly something else that investors are running shy of, other than sustainable bond funds generally active characteristics. Over the past quarter, £457m of those flows are accounted for by one mutual fund in the Bond Global Corporates LC classification, while the classification has seen £262m of conventional inflows. Similarly, one Bond Emerging Markets Global Corporates ETF accounts for £187m of redemptions over the quarter, while the classification was in the black regarding conventional flows.
Sustainable equity flows went £4.89bn to active funds, £4.29bn to passive mutual funds, and £1.1bn to ETFs.
Performance
Chart 5: ESG Top-Selling Classification Performance Versus Conventional Equivalents,
H1 2023 (Percentage Growth)
Source: LSEG Lipper
What a difference a quarter makes, especially when it comes to the 12-month results, where at the end of Q123, all three classifications, both conventional and sustainable, were in negative territory.
Given the tendency of sustainable funds to have a growth tilt, you might expect them to have taken the lead again over 12 months, but the results are patchy: while sustainable Equity Global funds are 140bps (basis points) ahead and sustainable emerging markets funds squeeze it by 18bps, conventional US funds still lead their sustainable peers by 36bps. The rebound hasn’t been enough to push sustainable Equity Global ahead over three years, where these funds still lag their conventional peers by 180bps, although they still have a commanding lead over five. Equity US conventional funds are ahead over three years, though there are few sustainable funds in this universe with a three-year record, and non with a five-year record.
What may be the case, especially regarding US funds, is that conventional funds have greater weightings to the tech leviathans that have driven the S&P500 rally so far this year than ‘darker green’ sustainable funds, which are less likely to earn their ESG spurs by simply overweighting tech and underweighting oil & gas. However, without digging deeper into stock and sector weightings, it’s not possible to tell.
Flows by Asset Manager
Chart 6: Largest Positive ESG Flows by Promoter, H1 2023 (£bn)
Source: LSEG Lipper
BlackRock again leads the pack, with £6.64bn of sustainable flows for H123, overwhelmingly to equity funds. That’s only slightly less than the other nine companies in Chart 6, which together took £6.72bn. HSBC was the only company here to see net flows of money market funds (£1.23bn), while Schroders took the only share of alternatives (£43m) and the largest of mixed asset flows (£395m). Sustainable real estate has been a quiet corner of the market, but Aviva makes an appearance with £121m of net flows.
