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April 30, 2024

Everything Green Flows, Q1 2024: Sustainable Equity Bucks the Trend

by Dewi John.

  • Asset Class: Sustainable funds took £7.63bn over Q1 2024 compared to outflows of £9.76bn for conventional funds, with the strongest flows to equity funds (£6.1bn).
  • Classification: Equity US funds were the most popular sustainable classification, netting £5.8bn, followed by Bond Global Corporates LC and Equity Europe ex UK.
  • Active v Passive: Index-tracking sustainable bond funds took 61.36% of sustainable bond flows over the quarter—a significant increase over 2023.
  • Fund manager: BlackRock saw inflows of £8.27bn, overwhelmingly to equities.


Sustainable versus Conventional Flows
by Asset Class

Chart 1: Asset Class Flows, ESG v Conventional, Q1 2024 (£bn)

Source: LSEG Lipper


Despite negative flows for equities overall (-£1.17bn), sustainable equity funds took in £6.1bn over the quarter—making it the most successful “green” asset class. This was followed by bonds, where sustainable funds netted £1.91bn, compared to £2.64bn for conventional bond funds.

There’s a definite shift taking place in sustainable fixed income fund markets. Contrast the take of sustainable flows as a percentage of the whole over FY 2023 (28.1%) with the same for Q1 2024—41.9%. In November 2022, when sustainable bond funds were losing money hand over fist, I pondered as to whether “these strategies have been a victim of the dearth of ethical fixed income passive funds, which represents an opportunity for those able to address the demand”. It looks like that demand has been addressed—although whether it’s through a flood of new launches is less clear. Six out of the top-10 bond money takers for the quarter are index trackers, netting £1.74bn between them. In total, index-tracking sustainable bond funds took 61.36% of sustainable bond flows over the quarter. Is this because of a broadening of sustainable passive bond fund offerings? Of the 542 share classes that saw flows over Q1, 107 were launched in 2023 or 2024. However, less than a quarter of those were passive vehicles (24). So, while new issuance is likely part of the answer, it doesn’t look like it’s all of it—or even likely to be the main driving factor. This is something we’ll revisit in future analysis.

All other sustainable asset classes were in negative territory over the period, albeit relatively modestly: alternatives (-£24m), mixed-assets (-£151m), money market (-£205m), and real estate (-£2m).


Sustainable versus Conventional Flows
by Classification

Chart 2: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, Q1 2024 (£bn)
Versus Conventional Equivalents

Source: LSEG Lipper


The changes have been rung in terms of best-selling classifications between 2023 and Q1 this year. The top three last year were, in order: Equity Global, Equity US, and Equity Emerging Markets Global. Equity Global flows have moved to the red (see chart 3). The three top sellers are Equity US (£5.8bn/£1.45bn conventional), Bond Global Corporates LC (£706m/£2.07bn), and Equity Europe ex UK (£577m/£94m).

Top-selling Bond Global Corporates funds—LC, EUR, and USD—have sold a combined £1.27bn, with Bond Global USD and GBP adding a further £638m. All the rest are equity classifications (although one Equity Real Estate, with most flows going to a single passive product).

Four classifications see positive sustainable flows alongside negative conventional ones, most notably Equity UK (£295m/-£15.04bn). While the largest seller is a passive product, most of the others in positive territory are active funds.

It’s notable that there are no mixed-assets classifications on chart 2. Balanced, Conservative, and Flexible are generally out of favour, although conventional Aggressive sees significant inflows. Nevertheless, this hasn’t translated into sustainable flows for the classification, which saw outflows of £22m over the quarter. As we’ve noted before, this would indicate that investors continue to tread cautiously around sustainable offerings in this space.


Chart 3: Largest Negative Sustainable Flows by LSEG Lipper Global Classification, Q1 2024 (£bn)
Versus Conventional Equivalents

Source: LSEG Lipper


Sustainable Equity Global funds saw the largest outflows over Q1, of £667m. This is something of a surprise, as over the longer term, they’ve been the default option for sustainable investors, and were the most favoured classification for 2023. What’s more, performance hasn’t been shoddy, with 12-month returns of 16.04%. It’s possible that this is a result of investors shifting out of broad global allocations, with more of a focus on the US market. However, this doesn’t explain why the conventional classification should still see inflows. Sustainable performance here has lagged conventional, and this would impact preferences. Also, net flows to Equity Global in 2023 were all to sustainable funds, with their conventional equivalents in the red, so a reversal in the wake of lagging performance seems possible.

Equity Theme—Alternative Energy funds continue to suffer, falling 7.86% over the year to quarter end, despite the generally positive environment for equities over the period. The classification has, rather less surprisingly, seen outflows of £250m. While rates stay elevated, it’s likely these headwinds will remain, so a return to favour seems unlikely.

Money Market GBP sustainable funds were in the red to the tune of £205m, but that’s merely the froth on the much larger £14.98bn redemptions this classification has suffered overall. It’s likely a similar story with Equity Asia Pacific ex Japan and Mixed Asset GBP Balanced sustainable funds, which saw redemptions of £184m to £3.26bn total and £180m to £9.64bn, respectively. The only other classification in chart 3 to see sustainable outflows alongside conventional inflows is Bond Global EUR (-£33m to -£302m).

Other sustainable themes have also suffered: Agribusiness (-£79m, of a total of -£173m) and Water (-£77m of a total of £13m). The latter is, again, something of a surprise as 12-month returns have not been too shabby—a quite respectable £15.13%.


Active versus Passive

Chart 4: Sustainable Active v Passive Asset Class Flows, Q1 2024 (£bn)

Source: LSEG Lipper


Sustainable equity ETF inflows declined over Q4, from the previous report’s £330m to £81m, only 2.86% of the passive equity total, with passive equity mutual funds attracting £2.76bn, compared to £3.27bn for active equity. There’s 46.48% allocation to passives.

On the bond front, passive mutual funds took £983m, ETFs £186m, while active bond vehicles netted £736m, with passive funds therefore taking 61.36% of the total, as noted under chart 1.



Chart 5: ESG Top-Selling Classification Performance versus Conventional Equivalents,
Q1 2024 (Percentage Growth)

Source: LSEG Lipper


The top-selling classifications, where we have a large enough universe of sustainable share classes to draw meaningful comparisons with, this quarter are Equity US, Equity Europe ex UK, and Bond Global Corporates EUR.

For the first time, we’ve got a long enough track record for sustainable Equity US funds to make a five-year comparison: they come out 6.26% percentage points ahead of their conventional peers and 2.06 percentage points ahead over three years, although lagging 2.45 percentage points over 12 months. Received wisdom is that ESG out/underperformance can generally be attributed to growth exposure and oil & gas underexposure. Were that the case, one would expect sustainable funds to lead over five years—or as long as the pre-COVID growth rally has a meaningful impact on returns—and lag over three, as the combined effects of rising rates and the oil & gas rally drive a coach and horses through the “ESG premium”. That clearly hasn’t happened here, so there’s something more happening than a simple two-factor effect, although we have noted the significant impact of these factors in the past.

European sustainable funds lag over all three periods (-0.76, -9.39, and -19.96 percentage points over one, three and five years, respectively). Sustainable Bond Global Corporates EUR lead over five years only, returning 4.79 percentage points more, though the universe size is still relatively small.


Flows by Asset Manager

Chart 6: Largest Positive ESG Flows by Promoter, Q1 2024 (£bn)

Source: LSEG Lipper


BlackRock dominates sustainable flows for the quarter, largely through its equity take of £7.15bn. The combined flows of the other nine funds in chart 6 are little more than one-fifth of that netted by the manager occupying the top slot. It also has the largest sustainable bond fund inflows, at £1.04bn. Outside of these two asset classes, flows were muted for the top players.


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