In previous years, the fourth quarter was the anchor of the race for sustainable fund flows, but flows in the fourth quarter of 2021 hit their lowest point of the year at $14 billion. On the contrary, sustainable flows peaked in the first quarter at $22 billion.
On average in 2021, sustainable fund flows represented 6% of total flows in the US funds market; in the last three quarters of 2020, this proportion was close to 10%. Some of the biggest winners in U.S. fund flows in 2021 were value stocks and fixed income, which include relatively few sustainable options for investors, especially given factors like track record and investment base. assets.
The full analysis can be found in our quarterly Sustainable Flows Report.
Passive funds continue to dominate sustainable fund flows
The chart below shows that sustainable passive funds still dominated their active peers, albeit to a lesser extent than in the past. Passive funds attracted net inflows of $8.8 billion for the period. This represented 62% of all sustainable flows in the United States, compared to a record 83% in the first quarter of 2020.
Equity funds made up the lion’s share of inflows, as they typically do. In the fourth quarter, equity funds attracted $11.4 billion, or 79% of all sustainable fund flows.
Despite this, the chart below shows that flows into sustainable fixed income funds have been steadily increasing. They crossed the $2 billion threshold for the first time in Q3 2020, and they’ve stayed above that mark ever since.
In the fourth quarter of 2021, they brought in nearly $2.9 billion, a new record for the asset class. The best-selling sustainable bond fund is Invesco Floating Rate ESG (AFRAX), which pulled in nearly $316 million for the period. In fact, Invesco Floating Rate ESG was the best-selling sustainable bond fund in 2021, beating TIAA-CREF Core Impact Bond (TSBIX) out of the top spot for the first time since 2013.
Leaders and laggards of sustainable funds flows
Invesco Floating Rate ESG was the only non-equity fund to make the fourth quarter ranking. Among the top 10 flow acquirers (listed below), it is also the most recent fund to adopt a sustainable mandate, having transitioned its strategy in Q3 2020.
Yet eight of the 10 funds attracting the most flows in the fourth quarter of 2021 were passive funds, and six were ETFs. Seven of them were also in the top 10 in the previous quarter: iShares ESG Aware MSCI USA ETF (ESGU), Vanguard ESG US Stock ETF (ESGV), iShares ESG Aware MSCI EAFE ETF (ESGD), iShares MSCI USA ESG Select ETF (SUSA), Vanguard ESG International Stock ETF (VSGX), FTSE Vanguard Social Index (VFTNX), and Brown Advisory Sustainable Growth (BAFWX). Notably, iShares ESG Aware MSCI USA ETF topped the list for the third consecutive quarter.
Active funds hold the majority of sustainable assets, but are shrinking
U.S. sustainable fund assets broke a new record high in the fourth quarter of 2021. As of December 2021, assets totaled $357 billion, as shown below. This is an increase of 8% from the previous quarter and more than 4 times the total of three years ago. Active funds retain the majority (around 60%) of assets, but their market share is shrinking. Three years ago, active funds held 80% of all US durable assets.
Sustainable launches reach new heights
As US flows to sustainable funds have gained momentum, asset managers have responded by expanding their sustainable fund ranges. The chart below shows that in Q4 2021, 45 funds were launched in the US with sustainable mandates. This is the highest number of sustainable funds launched in a quarter, handily beating the previous record of 38 funds set the previous quarter. Of these 45, 35 were equity funds and 26 were ETFs.
Again, most of the new sustainable funds available in the US are actively managed offerings. Eleven of the new funds focus on climate action, such as the JP Morgan Climate Change Solutions ETF (TEMP), which targets environmental sustainability themes including renewable energy and electrification, sustainable construction and low-carbon forms of agriculture. One of the new offerings focuses on innovative plant-based companies – VegTech Plant-based Innovation & Climate ETF (EATV)–but it’s not the first of its kind. US Vegan Climate ETF (VEGN) launched in the third quarter of 2019.
This quarter saw seven funds reallocated
Most of the new options available to investors have been launched with sustainable mandates, but companies also occasionally modify the investment strategies of existing funds to aim for sustainable results.
In the fourth quarter of 2021, two equity funds, four fixed income funds and one allocation fund were realigned to adopt sustainable mandates. The largest fund refocused to incorporate sustainability was AB Sustainable Thematic Balanced Portfolio (ABPYX), with $153 million in assets. The bottom seeks to invest in businesses that the firm believes are aligned with the United Nations Sustainable Development Goals, particularly those focused on the themes of health and climate.
New offerings and reallocated funds brought the total number of sustainable open and exchange-traded funds in the United States to 534 at the end of the quarter.
Regulators move toward reversing Trump-era sustainability guidelines
- ESG options for retirement savers. The US Department of Labor proposed a new rule in October that should make it easier for employers to offer sustainable funds in their workplace retirement plans. This proposal would lift rules that made it difficult and risky for employers to use ESG-focused investment options as default investments for workers automatically enrolling in a qualified plan. If the rule is finalized, as expected in 2022, it could incentivize employers to integrate ESG considerations into investment selection, giving pension plan participants more opportunities to select funds with ESG mandates. In turn, this could prompt more investment managers to consider ESG risks as part of the effort to maximize long-term risk-adjusted returns.
- No escape from shareholder rights. That same DOL proposal includes adjustments to Trump-era guidelines on the fiduciary duty to vote proxies and exercise other shareholder rights. Among other things, the proposed rule would remove statements such as “the fiduciary duty to administer shareholder rights attached to shares does not require the voting of every proxy or the exercise of every shareholder right” from the Department of Job. By doing so, the Biden-era DOL would encourage plans to exercise their rights as shareholders, which could increase participation in proxy voting activities on behalf of investors. The public comment period for these proposals ended in mid-December and we expect the guidance to be finalized in early 2022.
- The SEC joins the battle against greenwashing. In early 2022, we will also be keeping an eye on the SEC’s efforts to mandate disclosures related to climate risk and human capital management. In September, the SEC’s Corporate Finance Division shared a sample letter outlining comments related to climate change disclosure, which the division can issue to a public company after reviewing its filings with the SEC. The comments indicate that the SEC may seek explanations for any discrepancies between a company’s SEC filings and Net Zero Asset Managers’ corporate social responsibility report or pledge, among others. Over time, this may cause public companies to broaden the scope of their SEC filings, a win for ESG investors who rely on public disclosures.
- The importance of social policy replaces the specificity of the company. The SEC’s Corporate Finance Division issued a staff legal bulletin in early November that overturns Trump-era guidelines that limit the types of issues shareholders can resolve through corporate proxy votes. The previous guidelines increased the chances that voting actions filed by shareholders would be excluded under the long-standing “ordinary business rule,” which allows companies to omit resolutions that could impact their management and operations. day-to-day business operations, unless the issue has broader social policy relevance. The Trump-era interpretation narrowed the scope of shareholder resolutions deemed relevant to social policy by indicating that the proposal must also be demonstrably relevant to the company in question. This has led to the omission of several shareholder resolutions requesting climate change information from energy companies. The new position states that “staff will no longer focus on determining the link between a policy issue and the business, but will instead focus on the social policy significance of the issue that is the subject of the proposal.” of shareholder. In making this decision, staff will consider whether the proposal raises issues of broad societal impact, such that they transcend ordinary business activities.” This opens the door to resolutions on climate change and sustainability issues. social justice to make it a vote in future proxy seasons, which we consider a win for the end investor.