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May 2, 2023

Everything Green Flows, Q1 2023: Equities Dominate Sustainable Flows

by Dewi John.

  • Asset Class: Long-term sustainable funds attracted £4.11bn in Q1 2023, £3.81bn to equity funds, as their conventional peers took in £2.58bn.
  • Classification: Equity Global funds were the most popular sustainable classification, netting £2.34bn, followed by US and emerging market equity.
  • Active v Passive: Sustainable funds took more than half of passive fixed income flows despite comprising only about 10% of the market by AUM.
  • Fund manager: BlackRock saw inflows of £3.5bn, of which £3.02bn was in equity funds.

 

ESG v Conventional Flows by Asset Class

Chart 1: Asset Class Flows, ESG v Conventional, Q1 2023 (£bn)

Source: Refinitiv Lipper

 

Total net flows, excluding money market funds, for Q1 2023 were negative £6.69bn. That breaks down to inflows of £2.58n into conventional funds, and £4.12bn to sustainable funds. As is generally the case, sustainable equity took the best part of this: £3.81bn, with redemptions of £4.77bn from their conventional peers. Sustainable flows are flattered by the heavy redemptions from money market funds (£24.53bn), where this is overwhelmingly conventional.

While in the black, sustainable bond funds took only a fraction of their conventional peers: £393m compared to £7.02bn, or 6%. This is despite the fact that the asset class has enjoyed the bulk of inflows, so whoever cracks the sustainable fixed income market has a lot to play for in these market conditions.

While relatively modest, it’s something of a reversal of fortune for sustainable mixed asset, as the first quarter saw outflows of £146m and inflows of £1.11bn to their conventional equivalents (£1.6bn versus -£2.6bn). I’ll not speculate on why this is here, but will be looking at the trend and what’s driving it in pending research.

 

ESG/Non-ESG Flows by Classification

Chart 2: Largest Positive ESG Flows by Refinitiv Lipper Global Classification, Q1 2023 (£bn)
Versus Conventional Equivalents

Source: Refinitiv Lipper

 

Equity Global was the top-selling sustainable fund classification for 2022 (£14.1bn), and this continues in Q1, with £2.34bn of sales. However, while in 2022 these flows were accompanied by significant redemptions from their conventional equivalents, Q1 saw a relatively modest £31m redeemed.

Likewise, sustainable Equity US attracted £928m in Q1, compared to £2.9bn for the whole of last year. The difference this time is that conventional flows are almost twice that, at £1.72bn, where conventional US flows were slightly negative for 2022.

Equity Emerging Markets Global enters at number three (£332m), indicating that despite the general negative flows, there’s increased risk appetite from some quarters, with the classification as a whole taking £1.57bn.

Last year, Bond GBP Corporates was the only bond classification to make it into the top-10, while in Q1 it attracted £227m and was joined by Bond Global Corporates LC and Bond Global Short Term, albeit at relatively modest allocations of £180m between the two.

Money Market GBP has been removed from chart 2, as the scale of negative flows from conventional funds makes the rest of the chart impossible to read (-£2.51bn versus £462m for sustainable GBP cash funds).

 

 

Chart 3: Largest Negative ESG Flows by Refinitiv Lipper Global Classification, Q1 2023 (£bn)
Versus Conventional Equivalents

Source: Refinitiv Lipper

 

Those who, like me, struggle with eyesight somewhat past its prime will also struggle with the above table. This is because redemptions from sustainable classifications are still tiny when compared with conventional flows. The sum of sustainable redemptions on chart 3 is £553m, with the biggest, Bond GBP, being just -£134m.

Sustainable Equity UK suffered the second largest level of redemptions in Q1 (-£98m). While in the grand scheme of things, that’s pretty small beer—especially over three months—sustainable Equity UK was the fifth biggest-selling classification over 2022.

Both sustainable Mixed Asset GBP Balanced and GBP Conservative suffered outflows in Q1, which is in line with the broader market trend, as are the (albeit relatively small) inflows into sustainable Mixed Asset GBP Aggressive (£48m versus £2.24bn for their conventional equivalents).

 

ESG versus Non-ESG Fund Performance

Chart 4: ESG Top-Selling Classification Performance Versus Conventional Equivalents,
Q1 2023 (Percentage Growth)

Source: Refinitiv Lipper

 

As the effect of the oil & gas sector rally extends, it’s not surprising to see conventional funds outperform their sustainable peers over one and three years( -4.33% versus -3.24%, and 42.82% versus 46.46%, ESG to conventional). The degree of oil & gas’ outperformance (and the deflation of tech) is less of a headwind, more a force 8 gale. Equity Global ESG nevertheless holds on to its lead over give years by 4.31 percentage points, albeit by a shrinking margin.

As through 2022, the second most popular sustainable classification in 2022 was Equity US. Note that there are no US funds with a track record of five years—and the three-year cohort is light. However, focusing on the one-year returns, it’s interesting that sustainable funds beat their conventional peers by 71 basis points (bps), despite the US market being the home of big tech, and overweighting these stocks at the expense of big emitters being a fairly typical way that funds got their ESG stripes. Given the outperformance of energy over the period, there’s clearly something else going on here, and worthy of further investigation.

Similarly, sustainable emerging market funds outperform their conventional peers (by -3.44% to -4.56% over 12 months, and by almost 10 percentage points over five years), but underperforming over three.

 

Active versus Passive Flows

Chart 5: ESG Active v Passive Asset Class Flows, Q1 2023 (£bn)

Source: Refinitiv Lipper

 

In Q1, ESG funds took 34% of passive equity flows and 52% of passive bond flows. That’s broadly in line with the full-year flows for 2022.

There’s arguably a case that a greater product offering for fixed income would see a greater take for both fixed income funds in general and fixed income ESG in particular. As we’ve previously noted, in October 2022, passive bond funds had £56.2bn AUM, only £6.1bn of which was in ESG vehicles (10.9%). For active funds, those figures are £271.4bn and £84.1bn, respectively (31%). Of the nearly 2,400 primary bond fund share classes available to UK investors, only 124 were passive ethical funds, as defined by Lipper.

Another thing to note is the paucity of sustainable ETF flows. To some extent, however, this may be how we’re defining the UK universe in this fund: UK registered for sale, and sterling currency of record. It’s entirely possible that UK investors are buying ESG ETFs, but in other denominations.

 

Flows by Asset Manager

Chart 6: Largest Positive ESG Flows by Promoter, Q1 2023 (£bn)

Source: Refinitiv Lipper

 

BlackRock increased its lead over other sustainable fund providers to the UK market in Q1, taking £3.5bn, £3.02bn of which was in equity funds. That’s almost twice as much as the other nine constituents of chart 6 taken together. BlackRock also attracted most bond fund assets, at £427m.

Mixed assets were relatively thin on the ground, with Vanguard ahead of the other none, with £86m. Of the top 10, only HSBC had a toe in the money market water, with inflows of £462m.

 

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.

 

Refinitiv Lipper delivers data on more than 360,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

 

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