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Global sustainable funds are under withdrawal pressures but fund flows differ by region. Weaker demand for sustainable funds persists in the United States. While resilience is captured in the EU sustainable investment market. According to reported data from Morningstar, global sustainable funds attracted inflows of USD 13.7 billion in the third quarter of 2023, half of the revised USD 23.6 billion in the previous quarter.
FIGURE: QUARTERLY GLOBAL SUSTAINABLE FUND FLOWS ($USD BILLION) BY MORNINGSTAR
ESG Funds Definition by Morningstar: Sustainable funds are funds that use environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. They may pursue a sustainability-related theme or explicitly aim to create measurable social impact.
FIGURE: SIZE OF EXISTING ESG FUNDS IN CHINA BY QUANTDATA
Note: Statistics from Quantdata for existing ESG funds in China include ESG thematic funds, ESG strategy funds, and pan-ESG funds active in China as of Nov 5, 2023.
WHY ESG FUNDS ARE SLOWING DOWN?
Macro backdrop due to the pandemic and geo-political tensions, inflation, hiking interest rates, and recession fears continued to weigh on investor sentiment.
Cost-of-living against green priorities: Energy security and inflation are now back in the game competing with green priorities.
Poor performance in a market downturn: In 2022, the ESG approach did little to help protect investors from the brutal slide in the U.S. financial markets.
Sector concentration loss reveals in some sustainable funds invested in the once high-flying technology sector has been particularly hard hit this year amid rising interest rates, inflationary concerns and the possibility of a US recession.
Financial fallout and setbacks in some renewable energy companies due to lack of resilience in hiking interest rates.
Weaker NDC* seen in some regions, such as the UK government rowing back on some of its environmental pledges. Largely due to struggling economy and other political implications against transition cost.
Fear of greenwashing accusations and the uncertainties of the regulatory tightening on investment names rules on the use of ESG-related terms, e.g. EU, US, UK, Australia, etc.
Persist criticism over biases and transparency for ESG ratings/scores, and difficulties in consistent measurement for performance comparison among companies.
Source: GC Insights, Morningstar, Bloomberg, IFA Magazine, Quantdata
*NDC: National Determined Contributions.
A CYCLICAL NATURE OF FUND FLOWS WILL LIKELY CONTINUE TO SLOW DOWN INTO 2024
As the “ESG goldrush” dragged by the macro downturn, ESG Investors are seeking to capture quality growth, financial setbacks are testing issuers’ resilience, while ESG Fund Managers are tasked to develop ESG strategies that could deliver material ESG growth in compliance with regulatory tightening. ESG rating agencies are under scrutiny for the transparency of their rating methodologies as well. The strength of ESG funds is not yet coming through, stay tune for our next analysis on what's moving the ESG trends in 2024.