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January 30, 2024

Everything Green Flows: Sustainable Funds Stay in the Black Through 2023 as Conventional Peers Head to Red

by Dewi John.

  • Asset Class: Sustainable funds took £15.26bn over the year compared to outflows of £72.18bn for conventional funds (-£31.9bn excluding money market funds).
  • Classification: Equity Global funds were the most popular sustainable classification, netting £6.29bn, followed by US and emerging market equity. Global funds saw the strongest flows for Q4, at £1bn.
  • Performance: Global, US, and EM sustainable equity funds underperformed their conventional peers over 12 months and three years.
  • Fund manager: BlackRock saw inflows of £11.31bn, 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, FY 2023 (£bn)

Source: LSEG Lipper


In many respects, it’s been a challenging year for sustainable investments. For example, renewable energy companies, because of their debt-heavy nature, have been punished by elevated rates, and consequently investors have pulled USD 3.32bn globally from renewable energy specialist funds.

However, in the UK across all fund types, sustainable funds have had a good year, both relatively and absolutely. Over 2023, UK investors redeemed £56.91bn from mutual funds and ETFs. Some £39.55bn of that was from money market funds (MMFs), reflecting the deployment of capital after the dust had settled from September 2022’s mini-budget. However, that still leaves an exodus of £17.37bn from long-term funds.

The cards fall rather differently between sustainable and conventional funds. While the latter saw outflows of £72.18bn (£31.9bn excluding MMFs), sustainable vehicles enjoyed inflows of £15.26bn (£14.53bn).

Equities saw the biggest sustainable inflows, with £12.25bn, compared to £35.26bn of outflows for their conventional peers. In Q4, those figures were £1.74bn and -£8.15bn, respectively. However, December saw aggregate equity flows recover, as sustainable flows flattened.

Sustainable bond funds took £2.34bn over the year, compared to £8.3bn for conventional funds, or 28.1% of the total. Indeed, Q4 has seen something of a turnaround in sustainable bond fortunes, as for the first three quarters sustainable bond funds took £1.16bn—about one tenth of what their conventional peers netted. However, in Q4 sustainable bonds attracted £749m, while their conventional peers shed £1.04bn.

Sustainable real estate attracted £231m (£72m in Q4). That’s not earth shaking, but compares favourably to the £2.38bn of outflows from their conventional kin, as the overall picture for the asset class remains poor. Likewise, sustainable MMFs took £734m, while conventional MMFs haemorrhaged £40.28bn.

The one exception to this has been with mixed-assets funds, where sustainable funds saw outflows of £350m (£257m of that in Q4) as their conventional equivalents netted £1.42bn over the year.


Sustainable versus Conventional Flows
by Classification

Chart 2: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, FY 2023 (£bn)

Versus Conventional Equivalents

Source: LSEG Lipper


The three top-selling sustainable classifications for FY are unchanged from Q1-Q3: Equity Global (£6.29bn/-£648m conventional), Equity US (£3.91bn/-£4.33bn), and Equity Emerging Markets Global (£1.48bn/-£1.01bn). Over Q4, the largest flows were: Equity Global (£1bn); Equity US (£722m); and Equity Japan (£398m)—the latter reflecting the strong performance and perception of the Japanese equity market.

What’s interesting in the above chart is that seven out of the 10 top sustainable flows were from classifications where conventional funds saw outflows; for example, in Bond Global High Yield USD, where sustainable funds took £440, we saw £1.78bn of outflows for conventional equivalents.

Mixed Asset GBP Aggressive sustainable funds took just £402m, despite the classification as a whole netting £16.22bn, indicating that investors continue to tread cautiously around sustainable offerings in this space.


Chart 3: Largest Negative Sustainable Flows by LSEG Lipper Global Classification, FY 2023 (£bn)

Versus Conventional Equivalents

Source: LSEG Lipper


The largest outflows are from Bond GBP (£849m). However, £928m is from one share class. It’s a similar story with second-to-bottom Equity Asia Pacific ex Japan (£664m), where £578m is from one fund. Overall, this is the Law of Small-ish Numbers at work, where it’s difficult to draw trend inferences from what look like idiosyncratic moves confined to single funds or, at best, collateral damage from trends functioning at the broader fund classification level, such as with Equity UK, where there have been £247m of redemptions, alongside £15.37bn of conventional ones.

Where performance has struggled, such as in Global and US equities over three years (see chart 5, below), this has yet to be reflected in actual redemptions, although it can certainly be argued that it has acted as a brake on the pace of asset gathering.


Chart 4: Sustainable Active v Passive Asset Class Flows, FY 2023 (£bn)

Source: LSEG Lipper


Over the past quarter, all shades in both bars of chart 4 have headed upwards, so sustainable active managers in equity and bond have not succumbed to the sorrows of their conventional peers.

Sustainable equity ETF inflows picked up over Q4, from the previous report’s £26m to £330m. But that’s still only 5.4% of the passive equity total, with passive mutual funds attracting £5.81bn over the year. As previously, there’s an almost 50/50 split between passive and active sustainable equity funds. Passive bond funds have also increased their share over the past quarter, having taken £484m over the period, thus constituting 43.7% of sustainable bond flows.

This tallies with other indicators of investor sentiment. According to FTSE Russell’s 2023 Sustainable Investment Asset Owner Report, “an equal number (73%) of asset owners are implementing passive and active sustainable investment strategies, further highlighting the mainstream characteristics of sustainable investment being part of the flight to passive investment strategies.”



Chart 5: ESG Top-Selling Classification Performance versus Conventional Equivalents,
FY 2023 (Percentage Growth)

Source: LSEG Lipper


The three top-selling classifications of the full year are the same as over the first three quarters, so the chart constituents haven’t changed. However, the three-year rankings have seen US sustainable equity funds give up their lead, with the former now lagging by 5.7 percentage points. Conventional funds now lead in all three classifications over the period. That’s likely due to the three-year data now catching 2020’s “vaccine bounce,” when energy stocks roared ahead. Over five, sustainable equities have the edge in Global (by 3.1 percentage points) and Emerging Markets Global (1.9 percentage points) (there aren’t enough US funds to do the calculation over the period).

Over 12 months, sustainable funds in all three sectors lag their conventional peers, as was the case the previous quarter, although the lead is smaller. This, again, may be due to the effect of oil & gas stocks, as they underperformed in Q4, as did value, a factor to which sustainable funds tend to be underexposed.


Flows by Asset Manager

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

Source: LSEG Lipper


At year-end, BlackRock retains its lead, with £11.31bn of sustainable flows, overwhelmingly to equity funds (£10.1bn). That’s more than £3bn more than the combined flows of the other nine companies in Chart 6, which together took £7.89bn. As previously, HSBC was the only company here to see net flows of money market funds, although smaller than Q1-Q3’s £1.6bn, at £826, while Schroders took the only share of alternatives (£85m), and, as in H1, the largest mixed-assets flows (£660m). Vanguard followed, taking £301m.

BlackRock again leads the way on bond flows, taking £1.12bn—a significant uptick on the previous three quarter’s £214m. Legal & General saw the second-largest bond flows, at £335m.

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