Refinitiv Lipper’s analysis of environmental, social, and governance (ESG) investments in the UK market.
Over the first three quarters of the year, equity, bond, and mixed-assets funds have resisted the negative flows that have beset their conventional peers. However, a waning tide will eventually see all boats lower, and that’s what we have seen in Q3, as flows went negative for ESG equities and bonds, with only mixed assets managing to keep a toehold in positive territory. For equities, this seems to be less of a disenchantment with ESG per se, but rather a function of investors withdrawing money from the asset class in general. However, with regards to fixed income, the structure of the sustainable market is likely not working in its favour. As our colleagues in FTSE Russell have pointed out: “Many of the areas of sustainable fixed income have heightened exposure to interest rate risk, with lower yields and longer maturities, leading to higher duration risk.”
Source: Yield Book, as at August 31 2022
This well illustrated in the chart above, comparing the performance and duration of the FTSE Climate Risk Adjusted World Government Bond Index (Climate WGBI) to the World Government Bond Index (WGBI). The Climate WGBI has a higher weight in European and a lower weight in US sovereign bonds relative to the WGBI. However, the European sovereigns also have lower interest rates and longer maturity debt than those of the US.
The top-selling classification over three quarters—Equity Global—saw the second largest outflows for Q3 (£2bn), beating only Money Market GBP. Some of this money has been redeployed in Equity Global Income, where the classification has outperformed its Equity Global sibling. What’s more, ESG global income has managed to outperform not only non-income, but also non-ESG income—something that its rather counterintuitive sector exposures may have had something to do with (p8).
Mixed Assets the Only ESG Fund Group to Resist Outflows in Q3’s Febrile Markets
- Asset Class: While bond, equity, and mixed-asset ESG funds are in the black for the first three quarters, a dour economic climate has seen money taken off the table in the third quarter.
- Classification: Equity Global ESG leads for Q1-3, taking £10.9bn, despite outflows of £3.4bn for the third quarter, as investors pivot to Equity Global Income.
- Performance: Popular US equity funds have lagged their conventional equivalents over one, three, and five years, despite flows going strongly in their favour.
- Fund manager: BlackRock is way out in front for Q1-3, with net inflows of £3.6bn. Its ESG equity inflows for the period stood at £6.5bn.
ESG v Conventional Flows by Asset Class
Chart 1: Asset Class Flows, ESG v Conventional, Q1-3 2022 (£bn)
Source: Refinitiv Lipper
While there’s been much talk of a rush for the exits from ESG funds throughout this year, the figures for the first three quarters tell a rather different story. ESG equity funds are in the black to the tune of £10.9bn, while their conventional equivalents have seen redemptions of £46.3bn. Over the third quarter, however, things aren’t so rosy, as ESG equity funds have suffered outflows of £3.4bn. This doesn’t seem to be a function of the shine coming off ESG so much as a general shunning of equities, as their conventional peers have seen £20.7bn of redemptions over the same period.
Likewise, while ESG bond flows are in the black to the tune of £1.2bn over three quarters, that turns to -£1.3bn over the third quarter (as opposed to inflows of £1.3bn for conventional bond funds: see p2 for a short explanation of the likely cause of this). Mixed-asset ESG manages to stay in the black over both periods, if only just for the third quarter: £3bn and £106m, respectively.
Alternatives ESG saw outflows of £692m over the first three quarters (and -£1.1bn over the quarter), with conventional alternatives experiencing about 10-times this.
In short, while ESG flows have turned negative over the last quarter for most asset classes, this looks to be a function of general redemptions, rather than investors taking a view of the performance merits of these strategies—at least for now.
ESG/Non ESG Flows by Classification
Chart 2: Largest Positive ESG Flows by Refinitiv Lipper Global Classification, Q1-3 2022 (£bn)
Versus Conventional Equivalents
Source: Refinitiv Lipper
Over the first three quarters of 2022, Equity Global is still ahead, having taken £9.3bn. That masks a strongly negative third quarter for the classification, as it shed £2bn—the second largest redemption over the quarter, following Money Market GBP (-£8.8bn).
There seems to be a rotation out of Equity Global and into Equity Global Income, as the latter has seen inflows of £2.3bn over the first three quarters, with £640m of this in Q3—the largest allocation for any classification over the quarter. The flows for conventional Equity Global Income funds are positive for both periods, but by a much smaller number.
Equity US sustainable funds have also fared well, taking in £2.8bn over the first three quarters, and £274m over the third quarter. Flows for conventional funds were -£8.5bn and -£39bn, respectively—interesting as US equity ESG funds lag in performance terms of one, three, and five years (see chart 4, below).
What’s also interesting is the strong showing for Equity UK ESG over both periods: £1.1bn Q1-3 and £464m Q3. This is despite the fact that the classification in general remains deeply unloved by UK investors.
As noted above, mixed-assets funds have retained their attraction for investors, most notably Mixed Asset GBP Balanced (£18bn) and Mixed Asset GBP Aggressive (£1.3bn) over the three quarters. In contrast, Mixed Asset GBP Conservative saw redemptions of £67m over the same period.
Also of interest are the positive flows for Bond Global Inflation Linked funds of £440m over the first three quarters, despite seeing their performance pummeled due to their long-duration positioning, though this was reversed in the third quarter, with net outflows of £68m.
Chart 3: Largest Negative ESG Flows by Refinitiv Lipper Global Classification, Q1-3 2022 (£bn)
Versus Conventional Equivalents
Source: Refinitiv Lipper
As was the case the previous quarter, Money Market GBP funds bore the brunt of outflows: £20.3bn, or almost twice that of non-ESG money market funds. Why ESG cash funds are suffering more is something of a mystery, even if the overall reason for investors fleeing cash—inflation—isn’t.
Equity Asia Pacific ex-Japan enters the table at number two, with redemptions of £2.9bn, albeit with £2bn-plus being pulled from just one fund.
Alternative Credit Focus ESG also saw £1.2bn of outflows, the biggest of which came from a fund investing in asset backed securities—a strategy that has suffered from general redemptions over this period.
Chart 4: ESG Top-Selling Classification Performance Versus Conventional Equivalents,
Q1-3 2022 (Percentage Growth)
Source: Refinitiv Lipper
Chart 4 takes three top-selling sectors over Q1-3 22 and compares the ESG and non-ESG performance within these classifications over one, three, and five years.
In contrast to received wisdom, Equity US conventional funds have outperformed their ESG peers over one, three, and five years, not simply the 12-month period that has generally negatively impacted ESG fund performance.
While Equity Global performs in line with consensus expectations—ESG underperformance over the short-term, outperformance longer-term—its Income sibling does not. I’ve looked at some of the reasons behind Equity Global Income ESG’s outperformance over 12 months here, so won’t belabour the point once again, but rather point out that these ESG funds are on a par with their conventional peers in (outperforming) energy sector exposure, and—surprisingly—four percentage points underweight in underperforming tech.
Chart 5: ESG Active v Passive Asset Class Flows, Q1-3 2022 (£bn)
Source: Refinitiv Lipper
There’s been something of a turnaround over the past quarter, as over the first half of the year both active and passive strategies ESG were in the black for equity and bond funds. Active and passive have strongly bifurcated since, with active funds in negative territory over three quarters (-£1.3bn bond; -£3.4bn equity). Passive bond positive flows are broadly equal to active outflows, with ETFs being a notable winner in this space, taking in £922m. That bears a little further comment, as it’s also a distinct trend in the ‘conventional’ fund world—why are ETFs, particularly bond ETFs, so attractive in this market? First, they can be traded at any time, not just with daily settlement. So, if markets shift dramatically, as is their wont now, you can get out of your position quickly. Second, they’re transparent: you know what you’re holding, and the probable effect on your overall portfolio. That’s more difficult to judge with an actively managed fund.
Meanwhile, passive equity strategies attracted £5.7bn over the first three quarters of 2022, overwhelmingly to mutual fund structures.
Flows by Asset Manager
Chart 6: Largest Positive ESG Flows by Promoter, Q1-3 2022 (£bn)
Source: Refinitiv Lipper
BlackRock, as it was in H1, is way out in front for Q1-3, with net inflows of £3.6bn. ESG equity inflows for the period stood at £6.5bn, compared to £6.6bn for H1, offset by £3.7bn of outflows from money market funds.
BlackRock also saw the strongest bond inflows (£784m), overtaking Fidelity at £577m, while Schroders had the largest slice of the cake in both alternatives and mixed asset, at £148m and £358m, respectively. Invesco’s money market inflows were the largest, at £787m.
