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Sustainable Funds Had a Record-Setting Q1: Morningstar

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Sustainable funds in the U.S. set a record for flows in the first quarter, topping the previous quarterly record set in the fourth quarter, Morningstar reported Thursday.

Notwithstanding the sudden collapse of the bull market in February, the 314 open-end and exchange-traded sustainable funds available to U.S. investors had estimated net flows of $10.5 billion.

The quarter started with all-time monthly record flows of $5.2 billion. These slowed to $3.7 billion in February as the coronavirus pandemic gathered steam, and further eased to a still-positive $1.6 billion in March.

With first-quarter flows already at half the 2019 calendar-year record of $21.4 billion in net flows, sustainable funds are on track to eclipse that mark this year, even considering that the ongoing coronavirus pandemic could still wreak havoc with fund flows for the rest of 2020.

Jon Hale, Morningstar’s head of sustainability research, explains in a blog post why sustainable funds weathered the first quarter better than conventional funds.

According to the new report, some three-quarters of net flows went to ETFs and nearly 80% went to index funds, up from last year when environmental, social and governance ETFs took in only about 40% of overall sustainable fund flows and index funds about 60%.

Equity fund flows remained positive throughout the January-to-March period.

Sustainable fixed income funds experienced outflows in March, mirroring the overall trend for fixed-income funds. Morningstar said several factors may have been in play, such as quarter-end rebalancing after the sharp decline of equities and the need to raise cash in the new environment.

Passive funds captured an overwhelming 94% of flows among sustainable U.S. equity funds, while active sustainable funds clung to positive flow territory — unlike active funds overall.

For their part, passive sustainable international-equity funds attracted about 75% of flows and active funds also saw positive flows.

Rich Get Richer

In January, BlackRock’s chief executive announced that sustainability would be the firm’s new standard for investing. BlackRock’s 16 iShares ESG ETFs then proceeded to pull in $6.3 billion during the first quarter, accounting for 60% of the net flows into all sustainable funds in the U.S.

Sustainable investing’s increasing popularity also helped fatten other firms’ coffers in the first quarter:

  • Vanguard collected $1.8 billion across four funds
  • Calvert $1.6 billion across 28 funds
  • Dimensional $819 million across four funds
  • TIAA/Nuveen $642 million across 17 funds

Calvert was the only asset manager on Morningstar’s list with a long-standing firmwide commitment to sustainable and responsible investing, helped by its parent Eaton Vance’s distribution strength.