- Asset Class: Most sustainable asset classes were in the black—with equities taking £9.62bn—except mixed-assets, which saw modest outflows of £75m.
- Classification: Equity Global funds were the most popular sustainable classification, netting £5.17bn, followed by US and emerging market equity. US funds saw the strongest flows for Q3.
- Performance: Global, US, and EM sustainable equity funds underperformed their conventional peers over 12 months despite the recovery of growth over the period.
- Fund manager: BlackRock saw inflows of £8.73bn, 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, Q1-3 2023 (£bn)
Source: LSEG Lipper
I wish I had something novel to whet your appetites, but the chart above looks very similar to the previous quarter’s chart, both in terms of sustainable and conventional asset classes. The largest sustainable fund inflows for the first three quarters of the year so far have been into equity funds, which took £9.62bn (with £16.43bn of conventional outflows). Some £2.07bn of these sustainable flows were in Q3.
In comparative terms, all other sustainable flows are pretty muted: bond funds took £1.16bn—£271m in Q3—about a tenth of what their conventional peers netted, at £11.21bn. Sustainable money market funds were in the black for the year so far, at £800m (£119m for Q3), as their conventional peers shed £54.25bn. This outpouring of cash is a result of the redeployment of cash in the rush to safety by pension funds following last September’s mini-budget. The more modest shift to ethical money market funds may be a side effect, as pension funds use the shuffling of the deck to realign this part of their portfolios with their sustainable commitments—but that’s purely speculation on my part. Both sustainable real estate (£159m) and alternatives are positive this year so far (£72m) and over the quarter, despite negative flows for the asset classes’ conventional funds.
The only sustainable asset class to see outflows is mixed-assets, both over the year to date (-£75m) and Q3 (-£276m), with those promoters suffering worst being the same as the main beneficiaries during the previous upswing.
Sustainable versus Conventional Flows
by Classification
Chart 2: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, Q1-3 2023 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
The three top-selling sustainable classifications for Q1-3 are unchanged from the rest of the year: Equity Global (£5.16bn/£1.4bn conventional), Equity US (£4. 1bn/-£5.72bn), and Equity Emerging Markets Global (£1.28bn//£252m). The outflows from conventional US funds are a continuation of that seen in previous quarters, while the classification saw the highest inflows for Q3, at £1.42bn—which seems a little odd, given that the US equity fund market has not been a traditional home of ESG. That’s changing. A quick scan through the top ESG money takers shows BlackRock to be cleaning up here, with funds with a significant tilt to large cap tech.
Similar to previous quarters, a range of money market funds make it into the top 10 year to date: GBP (£773m); EUR (£450m); and USD (£373m). All their conventional equivalents are in the red.
Lastly, despite the negative fortunes for mixed assets overall, GBP Aggressive attracted £426m over Q1-3 (although just £30m for Q3). It’s noteworthy that the principal beneficiary seems to be Cazenove, with a number of its funds seeing significant inflows. Nevertheless, the YTD inflows are a fraction of the £1.32bn that the classification’s conventional funds took.
Chart 3: Largest Negative Sustainable Flows by LSEG Lipper Global Classification, Q1-3 2023 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
Compared to the previous quarter, while the rankings have changed a little, what was unloved stays unloved. Nevertheless, Bond GBP stays at the bottom of the pile (-£808m), despite conventional flows going from red to black between Q2 and Q3.
By and large, sustainable flows are in the same negative direction as their conventional peers, except for Bond GBP Corporates (-£247m/£3.88bn), Bond Emerging Markets Global Corporates and Bond Emerging Markets Global LC (respectively -£175m/£197m and -£118m/£651m).
Chart 4: Sustainable Active v Passive Asset Class Flows, Q1-3 2023 (£bn)
Source: LSEG Lipper
The main news contained in the chart above is that (almost) no one wants sustainable equity ETFs. They are seeing inflows YTD, but if you can see the £26m on your screen, either its resolution or your eyesight are much better than mine. All of that capital and more goes to one actively managed JP Morgan ETF, with sustainable ETFs seeing £19m of net outflows over Q3.
Otherwise, there’s an almost 50/50 split between active sustainable mutual flows (£4.83bn) and their passive peers (£4.76bn).
Sustainable bond funds are lower down the stack, with £1.16bn of inflows, going to active mutual funds (£677m), passives (£310m), and ETFs (£175m). There are two conundrums in these figures: first, why sustainable active bond funds seem to be doing so well relative to their conventional peers, which have suffered significant outflows in favour of passives for some time; and second, why sustainable bond ETFs are so much more popular than their equity equivalents, despite equities in general being a far bigger market.
As to the first, it’s likely that there remains a paucity of passive bond product. Whereas for the first, I’ve no answers immediately to hand. If you have, my email’s on the bottom of this document.
Performance
Chart 5: ESG Top-Selling Classification Performance versus Conventional Equivalents,
Q1-Q3 2023 (Percentage Growth)
Source: LSEG Lipper
Over five years, both Equity Global and Emerging Markets sustainable funds lead their conventional peers, by 2.44% and 6.91%, respectively (there aren’t enough US funds to do the calculation over the period).
That reverses over three years, with sustainable Global lagging by 6.27% and sustainable EM by 0.63%. However, sustainable US funds lead by 4.16%, albeit with a low sustainable sample size.
Over one year, sustainable funds in all three sectors lag their conventional peers. While it’s been a turbulent year for value versus growth—growth leading though concentrated on the S&P 500’s Magnificent Seven—this does imply that the underperformance of sustainable funds across the sectors may be for more reasons than growth exposure, for which performance is usually ascribed.
Flows by Asset Manager
Chart 6: Largest Positive ESG Flows by Promoter, Q1-Q3 2023 (£bn)
Source: LSEG Lipper
BlackRock again leads the pack, with £8.73bn of sustainable flows year to date, overwhelmingly to equity funds (£8.46bn). That’s more than the combined flows of the other nine companies in Chart 6, which together took £7.38bn. As in H1, HSBC was the only company here to see net flows of money market funds (£1.6bn), while Schroders took the only share of alternatives (£80m) and, as in H1, the largest mixed-assets flows (£512m). Bonds, overall, don’t make much of a dent on the table, but BlackRock again leads the way, taking £214m.
Despite outflows for the asset class in general, Aviva had £159m of inflows into real estate—the only one in the table to see this.
