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Portfolio > Portfolio Construction > ESG

Sustainable Fund Inflows Fell Sharply in Q1: Morningstar

By Michael S. Fischer

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What You Need to Know

  • They fell 37% globally and 26% in the U.S.
  • Flows into the broader market fell even more.

Net inflows into global sustainable funds plummeted 35.7% in the first quarter relative to the previous quarter, Morningstar reported Tuesday.

This was the sharpest quarterly slowdown in these funds’ net inflows over the last three years, and worse than the 33% drop in the 2020 first quarter, at the outset of the pandemic.

However, sustainable funds held up better in the first quarter than their conventional peers, which experienced a 73% inflows slump.

In the U.S., sustainable fund inflows slowed by 26% quarter over quarter, while flows into the broader U.S. market dipped by 65%.

Amid a broad market slowdown, global sustainable fund assets contracted to $2.8 trillion as of March from the restated $2.9 trillion at the end of 2021, their first dip since the first quarter of 2020, according to Morningstar. Year on year, however, the global sustainable fund universe expanded by 38%. 

Assets in U.S. sustainable funds declined during the broader U.S. market slowdown, amounting to $343 billion at the end of the first quarter, down 4% from the all-time record of $357 billion at the end of 2021. For perspective, assets in the overall U.S. market fell by 6% over the quarter to $26.5 trillion.

The global sustainable fund universe comprises 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.

Morningstar divides the global universe into three segments by domicile: the U.S., Europe and Rest of the World, and provides more granular data for Canada, Australia, New Zealand, Japan and a group of countries under the label Asia ex-Japan.

Europe continues to dominate the global sustainable fund landscape with 82% of sustainable fund assets, followed by the US, which domiciled 12% of global sustainable fund assets through March.

Equity vs. Bonds, Active vs. Passive

During the first quarter, net flows into U.S. sustainable funds posted their fourth consecutive decline, falling by 26% from the previous quarter to $10.6 billion, Morningstar reported. That was half of the all-time record of $22 billion, set one year ago.

Sustainable equity fund flows have steadily decreased over recent quarters, but flows into sustainable bond funds have increased in the U.S. In the first quarter, sustainable fixed income funds attracted a record $3.2 billion, up 9% from the previous period. 

Weaker flows into sustainable funds affected both active and passive strategies during the first quarter. Demand for sustainable active funds slid for the third consecutive quarter, attracting $4.8 billion. 

Morningstar noted that in recent years, investor preference has shifted toward low-cost passive funds. Over the past three years, passive strategies have attracted about two-thirds of quarterly sustainable fund flows on average. 

In the first quarter, however, the gap was smaller, with passive funds netting $5.7 billion for the period.

Even so, eight of the 10 funds that attracted the most flows in the first quarter were passive funds. 

Among them was the iShares Paris-Aligned Climate MSCI USA ETF, which launched in February and quickly amassed significant assets. Morningstar pointed out that climate-focused funds have grown significantly in recent years, with net inflows in 2021 of around $13 billion.

Here are the 10 sustainable funds that attracted the most money in the first quarter:

  1. Invesco Floating Rate ESG A (AFRAX): $1.2 billion 
  2. iShares ESG Aware MSCI USA ETF (ESGU): $956 million
  3. iShares ESG Aware MSCI EM ETF (ESGE): $722 million
  4. iShares Paris-Aligned Climate MSCI USA ETF (PABU): $608 million
  5. Vanguard ESG US Stock ETF (ESGV): $407 million
  6. Vanguard FTSE Social Index I (VFTAX): $364 million
  7. Fidelity U.S. Sustainability Index (FITLX): $362 million
  8. Xtrackers EM Carbon Reduction & Climate Improvers ETF (EMCR): $302 million
  9. iShares ESG U.S. Aggregate Bond ETF (EAGG): $293 million
  10. Calvert Bond A (CSIBX): $290 million

Michael S. Fischer

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