Funds that incorporate environmental, social and governance goals into their mandates are suffering something of a reversal of fortunes after a boom for the investment theme back in 2021.
Global sustainable funds attracted inflows of $13.7bn (£10.9bn) in the third quarter of 2023, just half of the revised $23.6bn in the previous quarter, the latest in a series of quarterly slowdowns for the theme amid spiralling outflows from sustainable funds in the US in particular.
So are investors turning their backs on the sustainable theme due to a change of heart?
We believe something less political is at play. Namely performance issues related to the broader market switch from growth assets that many sustainable funds invest in being in favour, to value assets.
Nick Henderson, fund manager on the team at Columbia Threadneedle Investments, the team behind the growth-oriented CT Responsible Global Equity fund, admits sentiment has “soured”.
But he agrees “that is largely down to underperformance in growth assets in response to the rising interest rate environment, which impairs the valuation of longer duration assets, most notably growth assets”.
The higher rate environment also devalues the present value of long-term project work, including the deployment of renewable energy projects, Henderson points out.
“This comes at a time of geopolitical tensions that has bolstered the traditional hydrocarbon energy market. This inevitably drives investor skittishness,” he adds.
Many sustainable funds cannot hold some of the more value-oriented sectors, particularly in the areas of energy and materials that have been strong performers in the past 18 months, so this has impacted returns and flows.
David Harrison, manager of the Rathbone Greenbank Global Sustainability fund, says the phenomenal growth in sustainable assets from 2018 until the end of 2021 meant a pullback was inevitable.
He adds: “I would argue this is actually helpful on a longer-term view and does not speak to structural issues”.
Harrison says: “After exponential growth in sustainable assets until the end of 2021, the recent correction will likely be healthy on a longer term view – it has highlighted which businesses have genuinely durable business models and can flourish in any economic environment.”
Data around slowing inflows for sustainable funds needs to be put in the context of a challenging environment of outflows for equity funds in general during 2022 and 2023.
The aforementioned data on a slowing in sustainable fund inflows in the third quarter of this year must be put into the context of both global mutual funds and the exchange-traded funds universe suffering actual outflows.
That said, Will Lough, manager of the value-oriented R&M Global Sustainable Opportunities fund, says: “It would certainly be fair to say that high-profile falls in the value of some of the ‘poster children’ of sustainability, such as Orsted in the renewable energy space, have emboldened critical commentators” of sustainable funds.
