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Sustainable Investing

Sustainable Fund Flows Reach New Heights in 2021’s First Quarter

Green funds are blossoming this spring.

Let the Flows Record Show

Once again, sustainable funds in the United States attracted an all-time record level of fund flows in the first quarter of 2021.

In the first three months of 2021, the U.S. sustainable fund landscape saw nearly $21.5 billion in net inflows. That’s more than the previous record for a quarter, $20.5 billion, set in the fourth quarter of 2020, and more than double the $10.4 billion seen one year ago in the first quarter of 2020. It was also about 5 times greater than first-quarter flows in 2019.

Once again, sustainable passive funds dominated their active peers in attracting flows. During the first quarter of 2021, passive funds claimed nearly $15 billion, or 70% of all U.S. sustainable flows. That split is fairly consistent with the average for 2020.

The five funds attracting the most flows in the first quarter of 2021 were all passive equity funds. Four of those were also in the top five for the fourth quarter of 2020: iShares Global Clean Energy ETF ICLN, iShares ESG Aware MSCI USA ETF ESGU, First Trust Nasdaq Clean Edge GreenEnergy ETF QCLN, and iShares ESG Aware MSCI EM ETF ESGE. Once more, iShares dominated the top five, with four funds collectively netting more than $5 billion in the first quarter.

Equity funds made up the lion’s share of flows, as they typically do. In the first quarter of 2021, equity funds attracted $18.7 billion, or 87% of all sustainable fund flows. On average over the three years that ended in March 2021, equity funds have attracted 74% of U.S. sustainable fund flows, peaking at 93% of flows in the first quarter of 2020.

Flows into sustainable fixed-income funds have been growing steadily, however. They crossed the $2 billion threshold for the first time in the third quarter of 2020, and they have stayed above that mark since. This quarter marks the first time they have crossed the $2.5 billion mark.

Assets Continue to Grow

Assets in U.S. sustainable funds have stayed on a steady growth trajectory. As of March 2021, assets totaled nearly $266 billion. That’s a 12% increase over the previous quarter and a 123% increase year over year. Active funds retained the majority (60%) of assets, but their market share is shrinking. Three years ago, active funds held 82% of all U.S. sustainable assets.

New Funds Launch With Sustainability in Mind

As U.S. flows into sustainable funds have gained traction, asset managers have responded by growing their sustainable fund lineups. In the first quarter of 2021, 11 funds were launched in the U.S. with sustainability mandates. Of those 11, 10 were equity funds, and eight were exchange-traded funds. Once again, most of the new sustainable funds available in the U.S. are actively managed offerings. Two of the new funds target hydrogen power, an emerging focus for renewable energy investors: Direxion Hydrogen ETF HJEN and Defiance New Gen H2 ETF HDRO.

Repurposing Funds for Sustainability

Most of the new options available to investors were launched with sustainability mandates, but firms also occasionally change the investment strategies of existing funds to target sustainability. In the first quarter of 2021, three AMG funds were repurposed to coincide with subadvisor changes on the funds. The largest fund repurposed in the first quarter was the $1 billion AMG GW&K ESG Bond MGFIX, formerly AMG Managers Loomis Sayles Bond Fund.

The new offerings and the repurposed funds brought the total number of open-end and exchange-traded funds in the U.S. to 409 at the end of the quarter.

For more insights on the evolution of the U.S. sustainable funds landscape and regulation of these products, sign up for our webinar.

For global sustainable fund flows for the first quarter, read our full paper. Morningstar Direct clients can find the full sustainable flows report here.

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