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A Broken Record: Flows for U.S. Sustainable Funds Again Reach New Heights

Net flows of $51 billion in 2020 were more than double the total for 2019 and nearly 10 times more than in 2018.

Sustainable funds in the United States continued to attract record flows from investors in 2020, just as they did the year before, and the year before that. During 2020, flows into sustainable open-end and exchange-traded funds available to U.S. investors reached $51.1 billion. That was a significant increase over 2019, when flows were $21.4 billion, and a nearly tenfold increase over 2018, when flows were $5.4 billion. Both the 2018 and 2019 flows had set calendar-year records. Sustainable fund flows constituted nearly a fourth of overall net flows into stock and bond mutual funds in the U.S. in 2020.

Flows are estimated for sustainable open-end funds and ETFs available to U.S. investors. The group includes equity, fixed-income, allocation, and alternatives funds that represent themselves to be sustainable investments. Often called ESG funds, environmental, social, and governance concerns are central to their investment process, and this is clearly apparent from reading the "principal investment strategies" section of their prospectuses. Funds of funds are not included because the asset flows of the underlying sustainable funds they use are already counted. The flows of repurposed funds--traditional funds that have been recast as sustainable--are counted as of the month they changed to their sustainable investing emphasis. At the end of 2020, the sustainable funds group included 369 funds. Helped also by market appreciation (most sustainable funds are equity strategies), assets in U.S. sustainable funds reached $236.4 billion, up more than 70% from 2019.

Investors poured $20.5 billion into sustainable funds during the final three months of 2020, setting a quarterly record, doubling the previous record for a quarter. Sustainable funds had attracted about $10 billion in each of the year's first three quarters, more than in any quarter prior to 2020. The surge in flows actually began with a noticeable increase in 2019's fourth quarter. For the past five quarters, sustainable fund flows have averaged nearly $12 billion per quarter, far more than had been the prior norm. In the five quarters prior (third-quarter 2018 through third-quarter 2019), flows averaged $3.1 billion per quarter, and in the five quarters before that (second-quarter 2017 through second-quarter 2018), flows averaged $1.5 billion per quarter.

ETFs dominated sustainable-fund flows for both the fourth quarter and the calendar year, attracting about two out of every three dollars invested. Given that most ETFs are passively managed and most sustainable funds are equity funds, flows into passive funds also dominated for the fourth quarter and calendar year. The dominance of passive flows is more recent among sustainable funds than it is in the broader U.S. fund universe. In 2019, the active/passive split was about 50/50 among sustainable funds. Since 2015, many passive sustainable funds have launched, and they have attracted more flows as they have built track records.

The dominance of ETF flows compared with open-end fund flows and of passive flows compared with those of active funds had a lot to do with iShares' growing suite of sustainable ETFs. In 2020, iShares launched 13 sustainable ETFs, including four funds of funds, to add to its 14 existing funds. Together, iShares funds captured nearly half of overall sustainable fund flows. Equity funds attracted about 90% of sustainable-fund flows in the fourth quarter and for the year overall. While sustainable fixed-income funds attracted far less flows, they surpassed the $2 billion mark in the fourth quarter after doing so for the first time in the third quarter. Fixed-income fund flows surpassed $6 billion for the year, another record.

Flows into sustainable funds represented 24% of overall flows into U.S. stock and bond funds for the year. It was not so long ago that sustainable fund flows failed even to register above 1% of overall fund flows. Sustainable ETFs attracted about 7% of overall ETF flows for the year. While investors pulled $289 billion out of open-end funds for the year, sustainable open-end funds attracted $17.4 billion. Investors pulled money from U.S. equity, sector-equity, international-equity, and allocation funds in 2020, but added money to sustainable funds in each of those category groups.

BlackRock's iShares suite of ESG ETFs dominated flows for the year, drawing $23.1 billion--45% of all sustainable fund flows. The iShares ESG ETFs brought in $8.6 billion in the fourth quarter.

Calvert Research and Management, recently acquired by Morgan Stanley, attracted $4.7 billion for the year and $1.7 billion for the fourth quarter. That placed Calvert among the 15 fund companies with the most open-end fund flows for the year. Vanguard, TIAA/Nuveen, and Invesco round out the top-five list of fund companies with the largest flows into sustainable funds for 2020.

For the year, 11 sustainable funds attracted net flows greater than $1 billion. In three of the top four spots were iShares ESG Aware ETFs, which BlackRock uses in various ESG-tilted model portfolios. In the top spot was the fund with the biggest allocation in those portfolios, iShares ESG Aware MSCI USA ETF ESGU, which has a Morningstar Analyst Rating of Silver and amassed $9.6 billion during 2020. Four of the funds with $1 billion in flows focus on renewable energy, which was one of the best-performing parts of global equity markets for the year. The others were two passive Vanguard funds and two actively managed funds, one equity and one fixed-income: Silver-rated Brown Advisory Sustainable Growth BIAWX and Bronze-rated TIAA-CREF Core Impact Bond TSBHX.

The pandemic, along with climate change, the movement for racial justice, and the election of 2020 and its aftermath have been and will likely continue to be catalysts for investors wanting to align their investments with their broader societal concerns. Sustainable funds performed well last year relative to conventional funds during the uncertain economic and market conditions caused by the pandemic, underscoring the value of considering ESG risks in portfolios. A post-pandemic "green" recovery could benefit the stocks of companies that produce more sustainable low-carbon products. BlackRock, the world's largest asset manager, continues to increase its emphasis on sustainable investing, with many other large asset managers beginning to follow suit. These factors point to a continued acceleration of sustainable fund flows in 2021.

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About the Author

Jon Hale

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Jon Hale, Ph.D., CFA, was head of sustainability research for Morningstar. He directs the company’s research initiatives on sustainable investing, beginning with the launch of the Morningstar Sustainability Rating™ for funds in 2016.

Before assuming this role in 2016, Hale was director of manager research, North America, for Morningstar, where he led approximately 60 manager research analysts based in North America and oversaw the team’s operations, thought leadership, and manager research coverage across asset classes.

Hale first joined Morningstar in 1995 as a mutual fund analyst and helped launch the institutional investment consulting business for Morningstar in 1998. He left the company in 1999 to work for Domini Social Investments, LLC before rejoining Morningstar as a senior investment consultant in 2001. He became managing consultant in 2009 and head of the Investment Advisory unit in 2014.

Hale holds a bachelor’s degree, with honors, from the University of Oklahoma and a doctorate in political science from Indiana University.

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