Global sustainable funds attracted close to $97bn of net new money in the first quarter of 2022, the latest study from Morningstar revealed.
This represented a fall of almost 36% relative to the fourth quarter of 2021.
The research also showed that despite investor concerns over inflationary pressures and the war in Ukraine, “sustainable funds still held up better than the broader market, which saw inflows slump by 73% over the period.”
The global sustainable fund universe encompasses open-end and exchange-traded funds that, by prospectus or other regulatory filings, claim to focus on sustainability; impact; or environmental, social and governance factors.
It is divided, in this study, into three segments by domicile: Europe, US and Rest of World.
Inflows fall, but sustainable funds hold up comparatively
The global universe of sustainable funds attracted $96.6bn of net new money in the first quarter of 2022, representing a fall of 35.7% relative to the revised $150.3bn of inflows in the fourth quarter of 2021.
Morningstar revealed that this is the sharpest quarterly slowdown in sustainable fund net inflows over the past three years, and atop the 33% decline experienced by sustainable funds in the first quarter of 2020 at the beginning of the coronavirus crisis.
“Similar to then, sustainable funds are currently facing macroeconomic headwinds, including inflationary pressures, rising interest rates, and market volatility stemming from the Russian invasion of Ukraine, which translated into a decline in net new investments in the first quarter,” said analysts.
Nonetheless, inflows in sustainable funds held up better than those of the broader market.
In comparison, inflows in the overall global fund universe nosedived by 73% in the first quarter of 2022 to $138bn, from $517bn in the fourth quarter of 2021.
Close to two thirds of the world’s new sustainable fund launches (64%) in the first quarter took place in Europe, which also saw many strategies being repurposed over the same period.
However, the 145 new European products launched in the first quarter are 30% fewer than in the previous quarter.
The US and Japan’s launches decreased by 45% and 79%, respectively, to 24 and five, while Australasia recorded no new product launch at all for the first time in years. Asia ex Japan (27 launches of sustainable funds) and Canada—with a record 26 launches—were the only regions to see an increase in their product development quarter to quarter.
US perspective
During the first quarter of 2022, net flows into US sustainable funds posted their fourth consecutive decline.
Inflows fell to $10.6bn – 26% less than in the previous quarter and half of the all-time record, nearly $22bn, set one year ago in the first quarter of 2021.
However, according to Morningstar, when compared with the broader US funds market, demand for sustainable funds showed higher resilience.
During the first quarter of 2022, flows into the broader US market dipped by 65% to $85.7bn.
Analysts added: “Confronted with volatility, inflationary pressures, and lofty valuations, investors appeared cautious. This was the weakest quarter since the first quarter of 2020, which was heavily influenced by the onset of the pandemic and a bear market.”
Last quarter, sustainable funds attracted 12% of total fund flows, compared with an average 6% of quarterly US flows over 2021.
Weaker flows into sustainable funds affected both active and passive strategies in the first quarter.
In recent years, investors have opted for low-cost passive sustainable funds. Over the past three years, passive strategies have attracted about two thirds of quarterly sustainable flows on average.
However, the split last quarter was close to 50-50.
Leaders and laggards
Still, eight of the 10 funds attracting the most flows in the first quarter of 2022 were passive vehicles.
Invesco Floating Rate ESG, which topped the chart this quarter, was the top fixed-income fund in terms of annual flows last year.
“Having only repurposed to a sustainable mandate in the second half of 2020, this fund has seen strong early adoption by the market,” said Morningstar analysts.
Remarkably, iShares Paris-Aligned Climate MSCI USA ETF only launched on 8 February 2022 and secured fourth place on the league table, attracting $608m during the quarter.
Climate-focused investing has grown tremendously over the past few years, raking in nearly $13bn in net flows during 2021.
Interestingly, some of the funds with the strongest inflows during 2021 topped the chart for outflows in the first quarter of 2022.
Morningstar said this may indicate investor redemptions from funds that have seen widespread demand.
For example, iShares MSCI USA ESG Select ETF SUSA, Parnassus Core Equity, and BlackRock US Carbon Transition Readiness ETF were all on the leaderboard for 2021, with annual flows of $1.7bn $2.4bn and $1.4bn respectively.
