Bucking the Trend, Flows Into ESG Funds Set Another Record in 2018

Despite significant market headwinds, U.S.-domiciled open-end and exchange-traded funds that practice sustainable investing attracted nearly $5.5 billion in net flows last year. That marks the third straight year of record annual net flows to sustainable funds and stands in stark 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 the worst since 2013, yet both environmental, social, and governance equity and bond funds garnered positive net flows. ESG bond funds set a record for annual net flows.

Last year's showing continues a six-year string of significantly higher annual net flows for ESG funds in the United States. In the four years after the financial crisis, 2009-12, annual net flows averaged a paltry $136 million. From 2013-18, average annual net flows were more than 30 times higher, at $4.4 billion, and for just the past three years, annual net flows have averaged $5.2 billion.

ETFs are beginning to reach parity with open-end funds in the ESG space. The ETF universe of sustainable funds attracted more than $2 billion in net flows last year, doubling its 2017 total and setting a record for the past decade. Prior to 2016, two thirds of the ETF universe of sustainable funds consisted of environmental sector funds. Over the past three years, ETF options have expanded dramatically, with 52 ESG-oriented ETFs having been launched in the U.S. Forty of the new launches are diversified equity funds and seven are bond funds. With these newer ETF options starting to attract flows in 2018, ETFs accounted for about 40% of overall net flows to sustainable funds. In the previous two years, ETFs had accounted for only about 20% of overall net flows to sustainable funds.

The ESG-focused ETFs from iShares drew the lion's share of ETF net flows. The 13 iShares ESG ETFs, including three launched during the year, attracted more than $1.5 billion in net flows in 2018, more than two thirds of the overall net flows to the 74 ESG ETFs available in the U.S. That's also more than iShares ESG ETFs attracted in flows over the previous four years combined.

Among the top 10 in ESG fund flows in 2018, the two funds attracting the most flows, TIAA-CREF Social Choice Bond TSBIX and Calvert Emerging Markets Equity CVMIX, are actively managed, but the other eight are passively managed. While all funds in the top 10 have attractive performance records, the list is exclusive to better-known asset managers with strong distribution capabilities.

Based on 2018 flows and trends over the past decade, we expect ESG flows to continue increasing as more investors and financial intermediaries become comfortable with the space, more passive options become widely available, more ESG funds establish longer-term records, and more asset managers ramp up their asset-gathering efforts.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.