Sustainable Fund Flows Dip for the Quarter but Peak for the Year
Passive funds are dominating flows but active funds still hold the majority of assets.
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. By contrast, sustainable flows peaked in the first quarter at $22 billion.
On average in 2021, sustainable funds attracted $17.3 billion in net flows each quarter, topping the $12.8 billion average seen in 2020 and leading to another record-setting year. In total, U.S. sustainable funds netted nearly $70 billion for the year, a 35% increase over 2020’s high-water mark.
The full analysis can be found in our quarterly sustainable flows report.
The chart below shows that sustainable passive funds still dominated their active peers, albeit by a smaller degree than in the past. Passive funds attracted net inflows of $8.8 billion for the period. This represented 62% of all U.S. sustainable flows, compared with the record 83% in the first quarter of 2020.
Equity funds made up the lion’s share of flows, as they typically do. In the fourth quarter, equity funds attracted $11.4 billion, or 79% of all sustainable fund flows.
Even so, the chart below shows that flows into sustainable fixed-income funds have been growing steadily. They crossed the $2 billion threshold for the first time in the third quarter of 2020, and they have stayed above that mark since.
In the fourth quarter of 2021, they netted nearly $2.9 billion, a new record for the asset class. The best-selling sustainable fixed-income fund was Invesco Floating Rate ESG (AFRAX), which attracted nearly $316 million for the period. In fact, Invesco Floating Rate ESG was the top-selling sustainable fixed-income fund in all of 2021, knocking TIAA-CREF Core Impact Bond (TSBIX) out of first place for the first time since 2013.
Invesco Floating Rate ESG was the only nonequity fund to make the fourth-quarter leaderboard. Of the top 10 flow-getters (shown below), it is also the most recent fund to adopt a sustainable mandate, having transitioned its strategy in the third quarter of 2020.
Still, eight of the 10 funds attracting the most flows in the fourth quarter of 2021 were passive funds, and six were ETFs. Seven of those 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), Vanguard FTSE Social Index (VFTNX), and Brown Advisory Sustainable Growth (BAFWX). Notably, iShares ESG Aware MSCI USA ETF topped the list for the third consecutive quarter.
Assets in U.S. sustainable funds crossed a new high-water mark in the fourth quarter of 2021. As of December 2021, assets totaled $357 billion, as shown below. That’s an 8% increase over the previous quarter and more than 4 times the total three years ago. Active funds retain the majority (roughly 60%) of assets, but their market share is shrinking. Three years ago, active funds held 80% of all U.S. sustainable assets.
As U.S. flows into sustainable funds have gained traction, asset managers have responded by expanding their sustainable fund lineups. The chart below shows that in the fourth quarter of 2021, 45 funds were launched in the United States with sustainable mandates. This is the highest number of sustainable funds launched in one quarter, handily beating the previous record of 38 funds set the previous quarter. Of those 45, 35 were equity funds, and 26 were ETFs.
Once again, most of the new sustainable funds available in the U.S. are actively managed offerings. Eleven of the new funds focus on climate action, such as J.P. Morgan Climate Change Solutions ETF (TEMP), which targets environmental sustainability themes including renewable energy and electrification, sustainable construction, and less carbon-intense forms of agriculture. One of the new offerings focuses on plant-based innovation companies--VegTech Plant-based Innovation & Climate ETF (EATV)--but it isn’t the first of its kind. US Vegan Climate ETF (VEGN) launched in the third quarter of 2019.
Most of the new options available to investors were launched with sustainable mandates, but firms also occasionally change the investment strategies of existing funds to target sustainable outcomes.
In the fourth quarter of 2021, two equity, four fixed-income funds, and one allocation fund were repurposed to adopt sustainable mandates. The largest fund repurposed to incorporate sustainability was AB Sustainable Thematic Balanced Portfolio (ABPYX), with $153 million in assets. The fund seeks to invest in companies that the firm believes are aligned with the United Nations Sustainable Development Goals, especially those focused on the themes of health and climate.
The new offerings and the repurposed funds brought the total number of sustainable open-end and exchange-traded funds in the U.S. to 534 at the end of the quarter.
Alyssa Stankiewicz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.