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Has increasing criticism of sustainable investing impacted sustainable funds?

Those of you in the US are no doubt aware of the rising “anti-ESG” chorus of critics (many renaming it “woke investing” – with this prominent critic announcing a run for US president), politicians and laws. It’s a chorus that is even migrating to the UK with the recent kerfuffle around NatWest’s Coutts & Co banking unit.

Is all this activity impacting on the assets invested in sustainable / ESG funds?

US financial services firm Morningstar recently released a report showing that, indeed, sustainable funds have taken a hit. According to Morningstar, investors redeemed US$635 million from sustainable funds in the three-month period ending June (or second quarter for investors), the third consecutive quarter of negative flows, “bringing net redemptions from these funds for the past year to $11.4 billion”. For comparison, “conventional” funds, not employing ESG, gained US $20 billion in assets during the second quarter.

However, the top two fund launches in the quarter were energy transition funds – “funds [that] track indexes that lean into companies that are well-positioned for the transition to a low-carbon economy or that are actively engaging in the climate transition…” – raising over US $2 billion each (tickers USCL and USCA for those curious).

They address an area of demand, and a more nuanced approach to energy investing versus “own anything” and “divestment” that we’ve heard from faith-based asset owners (FBAOs).

Meanwhile, fund managers, possibly seeing the short-term flow data as a blip versus a trend, continued to launch new sustainable funds, with 26 new funds added during the quarter. Making the sustainable funds more specific and simpler to understand may address some of the flow issues, something we’ve experienced in our work with FBAOs.

As one advisor put it: 'They do want ESG… At this point if we can show that a fund does ESG, that’s usually enough... However, [ESG] is complex, so people will often retreat back to standard vehicles because it is so complex.'


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