Refinitiv Lipper’s analysis of environmental, social, and governance (ESG) investments in the UK market.
Redemptions from “conventional” funds alongside strong flows to ESG funds has been a strong trend in equities for some time. Q1 2022 flows at the asset class level indicate that this may be starting to happen elsewhere, as alternative and bond funds exhibited the same pattern (p4).
In the case of equities, that’s not a like-for-like exchange, as (in broad terms) this goes hand in hand with a move out of UK equities and into global ones. There’s no clear trend apparent in bonds and alternatives, but it’s one to watch, to see how this plays out. Indeed, if investments are to be aligned with climate goals, that this should occur is a basic prerequisite.
Elsewhere, the strong revival of energy stocks and value is seeing an erosion of the “ESG premium” in certain top-selling sectors, as conventional Equity Global funds outperform their ESG peers over 12 months (p6).
Positive ESG/Negative ‘Conventional’ Flow Trend Spreads From Equities
- Asset Class: Equity ESG saw the strongest flows (£8.6bn) as investors dumped £10.8bn of their non-ESG peers.
- Classification: Equity Global retains its dominant position, with ESG to non-ESG flows £7.6bn to -£3.5bn over the quarter–-more than 10 times greater than the next, Mixed Asset GBP Aggressive (£665m).
- Performance: Although ESG outperforms over three and five years in the top-selling sectors, this is being eroded over the shorter term. ESG Equity Global returns over 12 months trail their non-ESG equivalents by 7.8% to 8.3%.
- Asset Manager: BlackRock was the quarter’s biggest money-taker quarter, mainly due to its equity offering, which netted £5.1bn.
ESG v Conventional Flows by Asset Class
Chart 1: Asset Class Flows, ESG v Conventional, Q1 2022 (£bn)
Source: Refinitiv Lipper
Alternatives, bond, and equity fund flows have been positive for ESG assets while negative both for conventional funds and overall. Equity ESG saw the strongest flows (£8.6bn), as investors dumped £10.8bn of their non-ESG peers. While this is a well-established trend with equities, there’s been a less distinct pattern with other asset classes, so it’ll be interesting to see if the same thing is happening here—investors swapping brown for green assets—and if it can withstand any sustained performance revival of the former.
Mixed assets ploughed their own furrow, with both ESG and non-ESG in the black, and indeed the latter out in front (£1.5bn versus £2.3bn) despite a broad range of ESG offerings in this market. Lastly, ethical and conventional money market funds were both in the red over the quarter (-£2.5bn versus -£9.4bn), although the negative flows were confined to the first two months, cash fund flows being strongly positive in March.
These figures are broadly in line with the trend over 12 months to the end of March, with ESG flows positive, the largest being to equity funds (£32.9bn) and most non-ESG risk assets seeing redemptions, the exception being multi-assets, where both ESG and conventional funds are in positive territory.
ESG/Non ESG Flows by Classification
Chart 2: Largest Positive ESG Flows by Refinitiv Lipper Global Classification, Q1 2022 (£bn)
Versus Conventional Equivalents
Source: Refinitiv Lipper
Equity Global continues its domination of UK flows, which we’ve seen for well over a year. ESG to non-ESG flows were £7.6bn to -£3.5bn over the quarter–-more than ten-fold greater than the next, Mixed Asset GBP Aggressive (£665m).
There’s not too much action with other equity classifications at the top of the table, as Equity Emerging Markets Global took £314m and Equity UK £275m. The positive flows for the latter were dwarfed by the £2.7bn outflows from conventional funds in the classification. That’s similar to the one-year pattern, with inflows of £3bn to ESG Equity UK, overshadowed by £12.8bn of outflows.
What is, perhaps, interesting is that where investors are waking up to the need to insulate the fixed income portion of their portfolios from inflation—Bond Global Inflation Linked—this too is being implemented through an ESG lens, with such funds taking £335m of the £348m total. Below the top 10, at 18, there are £70m of inflows to Bond Global Short Term ESG funds, as their conventional equivalents shed £107m.
On the negative side, apart from the dominant flows from money market vehicles, the next classifications are all bonds, accounting for £5.3bn of redemptions.
Chart 3: ESG Top-Selling Classification Performance versus Conventional Equivalents,
Q1 2022 (Percentage Growth)
Source: Refinitiv Lipper
Chart 3 takes the top-three selling sectors over the year and compares the ESG and non-ESG performance within these classifications over one, three, and five years.
Over three and five years, ESG funds are ahead across the three classifications. That’s greatest for Mixed Asset GBP Aggressive over five years, where the returns are 47.6% and 30.5%. Over the longer term, there is a smaller set of ESG funds, and a smaller number still have delivered considerable outperformance, and this will obviously impact the average more than in a larger set. However, if we remove returns of greater than one standard deviation above or below the median return, this only reduces the average by a couple of percentage points, to 45.8%. Even removing those funds with returns above one standard deviation, but leaving the underperformers in, gives an average of 37.7%, so the “ESG premium”—however this is being attained—is still considerable.
Shorter-term market movements are eroding this lead. ESG Equity Global returns over 12 months trail their non-ESG equivalents by 7.8% to 8.3%, while Bond Global Corporates USD ESG funds fell by 8 basis points (bps) more than their conventional peers over the same period.
This effect is particularly pronounced in the UK equity market, with a high proportion of energy stocks, which have done particularly well over the past year, and has a relatively pronounced value tilt. While ESG funds are ahead over three years, by a hair’s breadth of 15.9% to 15.8%, they lag over five—22.5% to 22.6%. And over 12 months, non-ESG funds return an average 7.1% to their ESG equivalents’ 3%.
Chart 4: ESG Active v Passive Asset Class Flows, Q1 2022 (£bn)
Source: Refinitiv Lipper
Over the past three quarters that we have conducted this study, we have seen passive’s share of ESG flows squeezed.
At the end of Q3 2021, passive funds took 39% of bond and 45% of equity fund ESG flows. Passive equity slipped slightly to 44% for the full year, while passive bond funds’ share slipped to 21%.
Our latest figures see market shares slip further to 16% (£224m) for ESG bond trackers and 31% (£2.6bn) for equity.
Flows by Asset Manager
Chart 5: Largest Positive ESG Flows by Promoter, Q1 2022 (£bn)
Source: Refinitiv Lipper
BlackRock is way out in front for the quarter, as it was for full-year 2021. This was almost exclusively down to its equity offering, which netted £5.1bn, which is almost half of its total equity fund inflows for 2021 (£10.9bn). Second-placed Royal London took £1.1bn over the quarter, albeit a far more evenly distributed field.
Fidelity experienced the largest bond fund inflows (£591m); Liontrust in mixed-assets (£331m), and Amundi in alternatives (£348m).
