Sustainable Bonds and Mixed Assets in the Red Over Q3 as Equity Increases
- Asset Class: Sustainable funds took £14.93bn over Q1-3 2024, compared to conventional funds outflows of £7.46bn, with sustainable equities netting £13.68bn.
- Classification: Equity US is the best-selling sustainable classification, with inflows of £13.5bn YTD. Conventional flows over the period were a more modest £1.6bn.
- Active v Passive: Passive bond redemptions for Q3 stood at £757m, as active bond funds saw inflows of £90m for the quarter.
- Fund manager: BlackRock saw inflows of £16.55bn, overwhelmingly to equities.
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 Assets and Flows by Asset Class
Chart 1: Sustainable Asset Class AUM, 2014 to Q1-3 2024 (£bn)
Source: LSEG Lipper
Since 2014, UK sustainable assets held in mutual funds and ETFs have increased from £32.93bn to £254.22bn, or 772%. By way of comparison, UK fund assets in total have risen from £1.19trn to £2.19trn, or by 194.8%, over the same period.
In 2014, sustainable fund assets comprised 2.77% of overall fund assets. This has now risen to 10.99%. As can be seen from chart 1, there was a period of accelerated growth in sustainable assets between 2018 and 2021—something not mirrored in the growth of assets overall.
Equity funds make up most assets, at 73.234%, followed by bond (13.96%) and mixed assets (11.35%). Alternatives, money market, and real estate funds make up less than 1% each of sustainable assets. The asset mix has changed between now and 2019, when equities stood at 59.83%, mixed asset (20.82%), and bonds (19.34%). So, while it’s generally believed that sustainable investing has diversified out from equities over time, the figures—in the UK, at least—show an increasing concentration on this asset class.
Chart 2: Five-year quarterly flows, to Q3 2024 (£bn)
Source: LSEG Lipper
The third quarter is unique, in that only sustainable equities and (very slightly) real estate are in positive territory. What’s startling is that sustainable bonds have never had a negative quarter until the latest. While one can’t be certain as to why this is happening, all and more of the £664m redemption came out of one global corporate bond ETF, so this feels like a big call from one, or a small number of, large institutional investors.
There has only been one quarter when equity flows have been less than half of the total (Q3 2022, at 29.1%). The average over the five years to Q2 2024 was 68.7%. Q3 2024 saw flows of £5.34bn into sustainable equities, with other sustainable asset classes seeing combined outflows of £1.21bn.
Bond flows peaked absolutely and in relative terms in Q2 2021—the overall peak for flows—when they attracted £3.64bn.
This was the worst quarter on record for mixed-assets flows. The asset class has been one of the few to suffer from net redemptions over recent quarters. Mixed-assets funds’ market share of flows peaked at 15.6% in Q4 2021 and has frequently dipped into negative territory subsequently. We looked at this issue in June 2023, and suffice it to say that the dial doesn’t seem to have greatly shifted since.
Total sustainable fund flows headed consistently up between Q4 2019 and Q2 2021, where they peaked at £17.22bn, from where the trend has been downwards, albeit still positive for each quarter.
There had been (and continues to be) an argument that sustainable investing doesn’t mean sacrificing performance. Up to the early part of the decade, that argument was being won on the back of return figures: in a low-rate, growth-driven environment, ESG funds, which tended to have more of a growth bias in the dominant equity space, were tending to outperform their conventional peers. However, as rates rose and some investors got nasty shocks from venturing into certain areas of the market such as alternative energy, there was a pull-back—even if the figures remain positive for the market overall.
Chart 3: Asset Class Flows, ESG v Conventional, Q1-3 2024 (£bn)
Source: LSEG Lipper
Despite outflows for equities overall (-£4.66bn) and heavy redemptions for the asset class over September, sustainable equity funds took in £13.68bn over Q1 to Q3, up from H1’s £8.71bn bn—making it the most successful “green” asset class by far. This was followed by bonds, where sustainable funds took £1.81bn for the period, compared to £2.36bn for conventional bond funds—despite, as outlined in chart 1, net redemptions over Q3.
Although real estate remains unloved by investors, and net flows being negative for the asset class’s sustainable funds in H1, they moved into the black in Q3 (YTD, £45m).
Lastly, sustainable mixed assets saw YTD redemptions of £470m, although conventional funds took £1.46bn over the period.
Sustainable Flows by Classification
Chart 4: Largest Positive Sustainable Flows by LSEG Lipper Global Classification, Q1-3 2024 (£bn)Versus Conventional Equivalents
Source: LSEG Lipper
Equity US is the best-selling sustainable classification, as it has been throughout the year, with inflows of £13.5bn YTD. Conventional flows over the period have been a more modest at £1.6bn. Given the focus on the US market, the Magnificent Seven and suchlike, it is rather surprising to see this played out primarily through the lens of sustainable funds.
Equity Global surges from eleventh place in H1 to second YTD (£2.73bn YTD; £2.56 for Q3). Quarter on quarter, Equity Europe ex UK remains steady, taking £1.34bn YTD.
The top six-selling sustainable sectors are all equity, with the next four being bonds. No mixed-asset classification makes a showing until fourteenth-placed Mixed Asset GBP Aggressive (£166m).
Equity Emerging Mkts Global maintains robust sales (fifth placed in both YTD and H1 reports), with sustainable outstripping conventional sales by £684m to £312m.
Despite the fact that most of the equity market performance that attracted investors to Japan was in the first half of the year, £339m of the £542m flows to its sustainable funds was in Q3, with Equity Japan the sixth-most popular classification YTD, but sitting just outside the table in the H1 survey.
Bond Global Corporates LC tumbles down the tables from the las quarter to this, from second to tenth placed, with redemptions of £742m for the quarter.
Chart 5: Largest Negative Sustainable Flows by LSEG Lipper Global Classification, Q1-3 2024 (£bn)
Versus Conventional Equivalents
Source: LSEG Lipper
First, a brief recap on the year’s first two quarters. In Q1, Equity Global sustainable funds saw the heaviest redemptions. This reversed in Q2, with Global taking £243m for H1. Equity UK, which made a rare foray into positive territory in Q1, then led redemptions, with sustainable funds shedding £2.28bn (conventional: -£11.59bn).
Equity UK still leads redemptions over Q1-3, with the classification’s sustainable funds shedding £3.65bn (conventional: -£19.72bn). It’s not hard to make the case that sustainable outflows here are merely collateral damage in the continuing malaise of UK equity funds.
The story is somewhat different for the (again) second-worst outflows of Equity Theme—Alternative Energy (sustainable: -£797m; conventional: -£10m). This is a classification that is by its very nature sustainability inclined. High rates in particular have provided a headwind, and YTD performance for the FTSE Environmental Opportunities Renewable & Alternative Energy index was down 8.39%. However, with changing macro conditions comes changing investment returns, and Q3 figures for the same are 2.62%. Whether that is enough to tempt investors back to a sector that’s seen some badly burned, though, remains to be seen. It’s certainly yet to work for either Equity Theme—Agribusiness (-£107m) or Water (-£142m), which have delivered stronger performance over the quarter.
More broadly, the rankings look little different than they did in our H1 2024 review.
Active versus Passive
Chart 6: Sustainable Bond (LHS) and Equity (RHS) Active v Passive Asset Class Flows,
Q1-3 2024 (£bn)
Source: LSEG Lipper
Passive bond redemptions for Q3 stood at £757m. However, one share class of a Bond Corporates Global LC saw outflows of £932m. Active bond funds, meanwhile, saw inflows of £90m for the quarter. From Q1 to Q3, passive bonds took in £830m, as their active peers netted £985m.
Meanwhile, passive equity funds netted £1.46bn for the quarter (£5.1bn YTD), behind the £3.63bn (£8.6bn YTD) of their active equivalents. The main money takers for both active and passive equity funds were Equity US.
Flows by Asset Manager
Chart 7: Largest Positive ESG Flows by Promoter, Q1-3 2024 (£bn)
Source: LSEG Lipper
BlackRock extended its H1 lead (££11.61bn) to £16.55bn. This breaks down to equity (£15.55bn), bond (£832—down on the previous quarter), and mixed assets (£214m). Despite Q3 bond outflows, though, it’s YTD take for the asset class are almost double of the runner up—Northern Trust—at £437m.
As mixed-assets flows are rather subdued for the period, BlackRock’s total is the largest in the asset class, Vanguard being second-placed with £195m.
None of the top money takers have a footprint in either alternatives or real estate.
