The number of sustainable investment funds has increased nearly 50% in the past year to 351, with total assets of $161 billion by the end of 2018, according to a new paper by Morningstar. A record number of those were launched in 2018 and more existing funds added environmental, social and governance criteria to their prospectuses, according to Jon Hale, director of sustainability investing research, who wrote the paper. In fact, there were 37 new funds launched last year, while 63 existing funds added ESG critieria.
This was surprising to Hale, who told ThinkAdvisor that the "flows continued to be strong relative to their past even during a year when overall fund flows were the worst they had been since the financial crisis."
Thus, despite the unfavorable market conditions in 2018, sustainable funds attracted record net flows of $5.5 billion. In fact, it was the third consecutive year of record flows. Hale notes in the paper that positive sustainable net flows stand "in contrast with the overall U.S. fund universe, which netted its lowest calendar-year flows since 2008. Stock market returns in 2018 were the worst since 2008, and bond market returns were the worst since 2013, yet both ESG equity and bond funds garnered positive net flows."
More remarkable, or perhaps not, was the performance of sustainable funds. Hale found that 63% of sustainable funds finished in the top half of their respective categories in 2018.
He also found that over the past three years the number of new sustainable funds has neared parity with open-end funds. According to the paper, 28 of the new fund launches were equity funds while nine were bond funds.
Some of the new funds targeted specific areas. For example, after the Parkland High School mass shooting, BlackRock launched an optimized ETF to "provide small-cap investors with a guns-free passive option where none existed before," Hale wrote. (ESML was launched in April 2018 and currently has $19.6 million in assets.) Other firms, notably Vanguard, launched two ETFs that screened out nonrenewable energy, vice products and weapons but did not "broadly incorporate company ESG metrics into portfolio construction."
IShares took two-thirds of all net flows for ESG-focused ETFs, with 13 funds that attracted more than $1.5 billion in net flows, according to Morningstar.
Other findings of the paper included:
- Passive ESG funds attracted the most flows. Of the top 10, only the top two were actively managed.
- Sixty-two funds added ESG as a criteria to their prospectuses, with 11 of those "completely repurposed into sustainable funds and renamed to reflect their makeover."
- International offerings in sustainable funds grew dramatically, including those in emerging markets and foreign large-cap funds.
Hale also developed a taxonomy around the 351 funds, which are:
