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What's Driving the Growth of Sustainable Assets?

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Sustainable fund assets under management in the U.S. had estimated net inflows of $2.9 billion in 2017, a 1.5% increase over 2016, according to a new report from Sustainable Research and Analysis. However, the trend is expected to accelerate, the report’s author, Henry Shilling, said in a statement.

Shilling noted that “while lines in the sector may be blurring in the future, fund flows into the sustainable investing sector should pick up as the segment continues to pivot away from a focus on religious/ethical and exclusionary strategies in favor of integrating [environmental, social and governance] factors to improve fundamental investment decisions and with increasing emphasis on shareholder engagement and proxy voting.”

He said the trend is likely to accelerate with the entry of traditional investment managers. Last year, for instance, JPMorgan and Morgan Stanley launched sustainable products, and they also repurposed existing funds by adopting ESG strategies that combine with fundamental investment decisions to inform better investment decisions.

In doing so, these two companies ascended into the ranks of the top 10 firms in the segment. Other firms, such as Pimco, AllianceBernstein Investments and Fidelity, also have entered the sustainable investing sphere with active and/or passive offerings, and Putnam Investments recently announced that it plans to roll out two actively managed ESG Funds.

The Sustainable Investing study points out these and other managers are expected to introduce more robust product offerings that should lift returns over time. When combined with effective pricing and expanded sustainable oriented disclosures, along with the potential uptake from robo-advisor platforms, larger numbers of institutional and individual investors are likely to be attracted.

In the future, it said, these developments could open the market to the $7.5 trillion defined contribution plan retirement market. In 2017, sustainable funds recorded strong absolute returns, although large-cap equity funds, based on the performance of the SUSTAIN Large Cap Index, trailed the S&P 500 Index by 265 basis points. In contrast, bond funds and world funds performed well on both an absolute and a relative basis.

Shilling said that beyond offering explicitly identified sustainable products, other actions by traditional managers are likely to result in stronger traction in coming years. Traditional managers have stepped up their proxy voting initiatives and engagements on ESG issues with corporations in the U.S. and abroad, and engagements with corporations by sustainable fund managers have led to changes in commitments on products, processes or practices.

Putnam Products

Putnam Investments is joining the growing number of asset managers that are moving to introduce ESG-focused funds. It expects to launch two actively managed ESG funds in March: the multi-cap Putnam Sustainable Leaders Funds and mid-cap Sustainable Future Fund, pending SEC approval.

Both funds are being formed through the repositioning of existing funds. The Leaders fund replaces the $4.3 billion Putnam Multi-Cap Growth Fund, and the Future fund replaces the $450 million Putnam Multi-Cap Value Fund.

Investors in the new ESG offerings stand to benefit because “companies engaged in sustainability often show enhanced fundamental and financial performance,” said Putnam’s chief investment officer for equities, Aaron Cooper, in a statement.

He adds that in addition to enhancing returns, stocks that qualify for their ESG attributes help to mitigate risk, which is an important consideration for investors in the current aging bull market trading near record highs. “These are high-quality businesses that will be more likely to better perform in a down market,” said Cooper.

Putnam hired Katherine Collins in May 2017 to serve as its head of sustainable investing; she will co-manage the Putnam Sustainable Leaders Fund, with Shep Perkins, co-head of equities, and the Putnam Sustainable Future Fund with Assistant Portfolio Manager Stephanie Henderson.