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Sustainability Matters

U.S. Investors Continue to Endorse Sustainable Investing

Last year’s record for flows was broken in July.

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Sustainable funds in the United States have attracted a record $30.7 billion in net flows so far in 2020. It only took until July this year for sustainable funds to garner more flows than they did in all of 2019, and last year’s $21.4 billion net flow was itself 4 times higher than in any previous year. This year, flows have been averaging about $10 billion per quarter. For the third quarter, estimated net flows totaled $9.8 billion, representing 10% of overall U.S. fund flows.



Flows are estimated for 344 sustainable open-end and exchange-traded funds available to U.S. investors. The group includes equity, fixed-income, allocation, and alternatives funds that have an ESG, Impact, or Sustainable Sector focus. Funds of funds are not included in this group.

Assets in U.S. sustainable funds climbed to $179 billion in the third quarter, up about 13% from $159 billion at the end of June.



Sustainable ETFs received more flows than open-end funds for the quarter, as has been the case throughout 2020, thanks to iShares’ growing suite of environmental, social, and governance ETFs. Open-end funds received a higher percentage of overall sustainable fund flows in the third quarter than they had in the first two quarters because of strong flows into open-end fixed-income funds. For the same reason, active funds fared somewhat better at attracting flows relative to passive funds in the third quarter, but passive flows remained substantially higher. Assets in passive ESG funds have grown rapidly over the past few years, reaching parity with active ESG funds in 2019. For this year to date, however, passive ESG funds have outdrawn active ESG funds by more than 2 to 1.



Sustainable funds represented about 10% of all flows into U.S. stock and bond funds for the quarter. It wasn’t so long ago when that percentage was routinely below 1%. In September, sustainable funds comprised 24% of the $12.7 billion in net flows of U.S. stock and bond funds. Granted, September was a bad month for overall fund flows, but sustainable funds appear to be on a secular growth path that hasn’t experienced the same ups and downs.

This picture can be seen in sharper relief for U.S. equity funds. Overall, U.S. equity funds had $118.5 billion in net outflows for the quarter. Sustainable U.S. equity funds, by contrast, attracted $3.8 billion.



IShares’ suite of ESG ETFs continued to dominate flows, attracting an estimated $3.5 billion for the quarter, for a year-to-date total of $14.5 billion. That’s 47% of the sustainable funds total for the year to date. It also represents more than 20% of total flows into iShares ETFs this year.

Calvert, an affiliate of Eaton Vance, which was acquired by Morgan Stanley earlier this month, nearly cracked the $1 billion mark in flows, while Vanguard, TIAA/Nuveen, and American Century rounded out the list of asset managers with the most flows for the quarter.



Five iShares ETFs placed among the 10 ESG funds with the most flows for the quarter, led by iShares ESG Aware MSCI USA ETF (ESGU) and iShares ESG Aware MSCI EAFE ETF (ESGD). These are low-cost passive funds that have modest tilts toward firms with better ESG practices while keeping tracking error low relative to conventional market-cap-weighted indexes. They are receiving significant allocations from model portfolios run by BlackRock, including the iShares ESG Aware Allocation ETF series and the just-launched BlackRock LifePath ESG Index target-date funds.

Three actively managed funds cracked the top 10, including two funds that have been attracting flows on a consistent basis: Brown Advisory Sustainable Growth (BIAEX) and TIAA-CREF Core Impact Bond (TSBRX). By contrast, American Century Sustainable Equity (AFDIX) benefited from a large inflow in July but has been cash-flow negative otherwise this year. Renewable energy has been on a tear this year, helping lift two funds into the top 10 for fund flows in the third quarter: iShares Global Clean Energy ETF (ICLN) and Invesco Solar ETF (TAN).

Not only have U.S. sustainable funds already set a calendar-year record for the fifth consecutive year, they are on track to double their 2019 flows. Sustainable funds continue to perform well relative to the broader universe of funds under uncertain market and economic conditions, which have underscored the value of considering ESG-related risks in portfolios. The urgency of the pandemic, climate change, and the movement for racial justice, even the election, have likely spurred more interest among investors to align their investments with their broader concerns.

For global ESG fund flows for the third quarter, read our full paper

Jon Hale (jon.hale@morningstar.com) 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.

Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.