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Sustainable Funds U.S. Landscape: 5 Takeaways From Our 2018 Report
A look at ESG fund flows, performance, and trends
In what proved to be a tough year for mutual funds overall, the small
but growing subset of sustainable funds enjoyed a record year of
inflows and strong relative performance in 2018. The group expanded to
include fund debuts and a host of new converts that rewrote their
prospectuses to reflect the growing importance of environmental,
social, and governance considerations in their investment processes. In our most recent Sustainable Funds U.S. Landscape Report, Jon
Hale, our global director of sustainability research, examines key
developments in the sustainability funds group. The ESG fund group—defined in our research as open-end and
exchange-traded funds that self-select as sustainability-focused
offerings—attracted record net flows in 2018 despite unfavorable
market conditions. Non-ESG funds domiciled in the United States
collected less than half their historical annual 2008-17 average net
flows last year; meanwhile ESG funds continued a six-year string of
ever-higher annual net flows. In 2018, these funds pulled in nearly $5.5 billion in estimated net
flows; assets under management in the subset—which includes funds that
have converted to ESG strategies—reached $161 billion.
Nearly 40% of those inflows were captured by exchange-traded
products, including those fielded by giant provider iShares. The
number of sustainable ETFs launched between 2016 and 2018 just about
kept pace with open-end funds; of the 37 fund launches in 2018, 18
were ETFs. It’s worth noting that the number of sustainable ETF options
available to investors grew dramatically over the same period.
ESG-oriented ETFs used to be mainly sustainable sector offerings, but
over the past three years, most new launches were diversified equity
strategies that can serve as core holdings.
The rising dominance of ETFs matters here—both for investors, who
struggle to balance their desire to integrate ESG into their
portfolios with their skepticism of higher fees, and for fund shops
that have long-established positions in this space. Behemoths like
BlackRock and Vanguard bring increasing fee pressure into an area that
has historically been associated with higher costs. From an investment performance perspective, 2018 was a solid year
for sustainable funds. On average, they outperformed their peers, with
63% of sustainable funds finishing in the top half of their respective
Morningstar Categories. Another strong year meant that 58% of the
subset ranked in their category’s top half over the trailing five
years, which included periods of equity market strength, such as 2017,
and moderation, such as 2015 when the S&P 500 barely managed a
positive return.
We saw four broad approaches to sustainability funds emerge in last year:
We note that many fund shops are increasingly adding ESG criteria
to the investment processes of existing funds and, in some cases,
completely repurposing existing offerings as sustainable strategies.
In 2018, 51 U.S. funds added ESG criteria to their prospectuses,
indicating that they are formally considering ESG issues as one
component in their security-selection process. Not surprisingly, these
funds generally fall into the ESG consideration approach, but the
changes indicate that ESG factors are increasingly becoming a standard
part of many investment processes.Gabriel Presler
Another record year for ESG flows
ESG ETFs gain ground
Sustainable funds’ relative performance is strong
4 approaches to sustainable funds in 2018
New converts
Download our 2018 Sustainable Funds Landscape
Report.