Blue Planet documentary fuelled UK appetite for ESG funds, says Calastone

flows

British investors showed more enthusiasm for ESG funds over the last three years than any other category of investment fund, according to a special edition of the Fund Flow Index from Calastone, a global funds network.

By analysing hundreds of millions of fund transactions, the firm tracked investor appetites for different investment flavours. It found that a big change in appetite for ESG funds began in the autumn of 2017, with inflows multiplying 37x in three years.

Calastone also noted that this seemed to correlate most strongly to environmental concerns, rather than moral or social ones. 

Edward Glyn, head of Global Markets at Calastone, explains: “It’s surely no coincidence that the growth in ethical funds took off in the autumn of 2017 when Blue Planet II shocked the world by revealing the extent of the ocean plastic pollution problem. A few months after that extinction rebellion was formed and then Greta Thunberg addressed the UN Climate Change Conference in Poland.” 

Looking at the 373 equities, fixed income, and mixed asset funds in the UK that marketed themselves in line with ESG, Calastone saw that between 2015 and 2017, little or no new money was invested in these funds. 

In the 31 months up to July 2017, a tiny net GBP107 million was invested in ESG funds, the result of GBP6.4 billion of two-way trading. There were several months of outflows too. In other words, buying activity roughly matched selling activity for almost three years. 

In the 33 months after July 2017 (up to April 20), the total volume of trading more than doubled to GBP16.5 billion, but far more of that trading was from buying activity as more and more investors opted for ESG funds. Net fund inflows jumped to GBP3.9 billion, 37x greater than the net inflows running up to July 2017.

In the last three years, Calastone’s ESG Fund Flow Index averaged 61.9, meaning that buying activity was almost two thirds larger than selling activity. This is comfortably the most positive reading for any of the fund categories Calastone measures. Passive equity funds, for example, have also been extremely popular, but these have only averaged a reading of 59.0, while global equity funds have registered 58.0. By contrast, in the same period active equity funds (excluding ESG) have seen a small outflow of capital, while European equity funds have been strongly negative, with FFI readings below the 50 neutral mark.

January 2020 saw record inflows to ESG funds. GBP395 million was invested – meaning that January saw almost as much new money as all of 2015, 2016 and 2017 put together. Even March 2020, which saw unprecedented outflows from funds as the pandemic shattered sentiment and saw billions flood out of ‘regular’ funds, ESG funds only saw GBP17 million of outflows. Inflows returned in April to the tune of GBP334 million.

ESG funds are still a niche category compared to regular funds (only around 3 per cent of the total market), so a good way of comparing the inflows is to consider them relative to the value of funds under management. In the year to the end of March ESG equity funds garnered GBP5.10 per GBP100 AUM, compared to just 30p for regular equity funds. 

“ESG investment struggled for a long time to gain real, mainstream traction among investors, perhaps thanks to a lack of understanding and consistency around what labels like ‘ethical investment’ and ESG actually mean and therefore what the products offer. But it also reflected a perception that ESG investment may well entail lower returns,” says Glyn.

“This is now changing. Fund management groups are investing heavily in the category in response to growing investor demand. This higher profile for ESG funds and a growing focus on managing non-financial operating risk is driving demand higher too from institutional investors. There is also no reason why returns should be lower, especially as governments and courts around the world increasingly expect corporates to bear the cost of poor practices – the vast class-action suits against tobacco companies are a case in point.”