Flows into U.S. sustainable open-end and exchange-traded funds are on pace to smash the calendar-year record set last year. Sustainable funds attracted an estimated $8.9 billion in net flows in the first half of 2019, surpassing their $5.5 billion in flows for all of 2018. Flows into sustainable funds have set calendar-year records for each of the past three years and appear headed for a fourth.
The second-quarter total of $4.7 billion surpassed the previous record for a quarter, which had been set with the first quarter’s $4.1 billion in flows. Prior to that, the record high for a quarter had been $1.9 billion in the fourth quarter of 2016.
In the second quarter, the largest net flows went to the new iShares ESG MSCI USA Leaders ETF SUSL, which attracted $1.4 billion. SUSL received more than $800 million at launch from Ilmarinen, Finland’s largest pension insurance company. The same firm provided a similar amount at the launch of Xtrackers MSCI USA ESG Leaders Equity ETF USSG during the first quarter. Helped by SUSL, ETFs attracted 58% of overall flows for the quarter.
Fifteen funds garnered at least $100 million in net flows in the second quarter. Eight are passive equity funds, including two Vanguard funds, four iShares ETFs, and Calvert US Large Cap Core Responsible Index CSXAX. Five are actively managed equity funds, led by Brown Advisory Sustainable Growth BIAWX and Parnassus Mid-Cap PARMX. Two are actively managed bond funds, including TIAA-CREF Social Choice Bond TSBIX, which gathered more than $500 million for the quarter, and Calvert Bond CSIBX.
Overall, 138 out of the 271 funds in the group had positive estimated net flows for the quarter of at least $1 million, while only 58 had negative net flows of at least $1 million. The remainder had inflows or outflows of $1 million or less. Just two funds shed more than $100 million, both actively managed funds from Parnassus with large asset bases.
From 2009 to 2014, Parnassus Core Equity PRBLX grew to be the largest fund in the group on the strength of strong performance. It currently has about $17 billion in net assets. Average performance from 2015 through 2017 turned flows negative, and in the second quarter, the fund lost nearly $600 million, representing about 3% of its net assets. A similar fate has befallen the much-smaller Parnassus Endeavor PARWX ($4 billion in assets), which shed $224 million in the second quarter, representing about 5% of its net assets. While Parnassus Endeavor’s performance relative to the large-blend Morningstar Category has been subpar from 2017 through June of this year, Parnassus Core Equity’s returns have been in the top decile of the same category for the last year and a half.
These statistics are based on Morningstar’s estimated net flows into 271 open-end and exchange-traded funds that are available to U.S. investors, all of which thoroughly integrate ESG into their investment process, and/or pursue a sustainability-related theme, and/or seek measurable sustainable impact alongside financial return. This universe does not include funds that employ only limited exclusionary screens without a broader emphasis on ESG, nor does it include the growing number of funds that say they may consider ESG factors in their security selection. Funds of funds are not included under the assumption that their flows are represented by the underlying funds that comprise their portfolios.
At the firm level, BlackRock’s iShares unit gathered the most assets, helped by the seed money put into SUSL. Calvert, which offers a full suite of ESG funds, drew an estimated $780 million, paced by Calvert Bond ($250 million), Calvert Emerging Markets Equity CVMAX ($184 million), and Calvert US Large Cap Core Responsible Index ($181 million). Vanguard continued to attract assets into its ESG funds, which total four with the June launch of the actively managed Vanguard Global ESG Select Stock VEIGX. The fund attracted $57 million in its first month.
For some time, we’ve seen growing levels of investor interest in sustainability but, in the fund universe, a lack of availability across the range of asset classes. With record numbers of sustainable funds launched since 2015, the supply side has been largely addressed. As these funds have developed their track records, they have begun to attract more assets. Moreover, the recent fund launches have included many open-end and exchange-traded index funds, which addresses increasing investor preference for passive investing. Finally, when behemoths like BlackRock and Vanguard increase their offerings in this area, they draw the attention of even more investors. As a result, expect the strong flows into sustainable funds to continue.
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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.