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Sustainability Matters

Sustainable Funds Continue to Rake in Assets During the Second Quarter

ESG fund flows have already nearly matched last year's record.

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Sustainable fund flows in the United States continued at a record pace in the second quarter of 2020, with estimated net flows of $10.4 billion. That nearly matched first-quarter flows and brought the total for the first half of the year to $20.9 billion, just shy of the annual record of $21.4 billion in sustainable fund net flows set in 2019. Last year's flows were 4 times the previous record for a calendar year.

Flows are estimated for 315 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.

Most of the quarter's flows came as equity markets rebounded in April. Investors poured $5.8 billion into sustainable funds in April, almost all of it to equity funds. It was the largest monthly flow ever recorded for sustainable funds in the U.S.

While U.S. investors overall poured money into bond funds and pulled record amounts out of stock funds during the second quarter, both stock and bond environmental, social, and governance funds experienced inflows. Investors overall pulled an estimated $137 billion out of stock funds, but ESG investors put $9.3 billion into stock funds. Flows into sustainable equity funds went mostly to passives (73%), but active sustainable equity funds had inflows of $1.8 billion. Four of the top 10 fund flows went to active funds.

Not surprisingly then, for the second quarter in a row, ETFs captured a majority of flows, on the strength of BlackRock's iShares, which now has 21 ESG funds in its lineup. DWS' Xtrackers and Nuveen also had success attracting assets to their ESG ETFs for the quarter.

After dominating flows in the first quarter, iShares' ESG ETFs continued that dominance in the second quarter, attracting $4.7 billion. That amount was nearly 5 times more than second-place finisher Calvert, which, along with TIAA/Nuveen, was also in the first-quarter's top five. Calvert's 12-month organic growth rate is the third largest among the 100 largest fund companies.

Not only did iShares dominate overall ESG flows for the first half of 2020, but ESG flows also contributed significantly to iShares' own overall flows. For the year to date, iShares' entire lineup of stock and bond ETFs attracted an estimated $41.5 billion; ESG flows made up about 27% of that total.

Most of that $41.5 billion in overall flows went to iShares bond funds; only about $4.2 billion went into equity funds. But of the $11.0 billion in iShares ESG flows in the first half, about $10.7 billion went to equity funds. Were it not for sustainable equity fund flows, iShares' overall equity flows for the first half would have been negative to the tune of about $6.5 billion.

Three iShares ETFs topped the list of ESG funds with the most flows for the quarter: iShares ESG MSCI USA (ESGU), iShares ESG MSCI EM (ESGE), and iShares ESG MSCI EAFE (ESGD). These are low-cost passive strategies that modestly tilt toward firms with better ESG practices while sticking close to conventional sector weights and position sizes. They are receiving significant allocations from ESG model portfolios run by BlackRock, including the iShares ESG Aware Allocation ETF series, which launched during the quarter.

Four actively managed funds made the top 10, including two from Parnassus--Core Equity (PRBLX) and Mid Cap (PARMX)--along with Brown Advisory Sustainable Growth (BIAWX) and Calvert Equity (CSIEX). The first three have been standout performers both this year and over the longer run. Calvert Equity hasn't fared as well this year relative to the large-growth Morningstar Category, but it has a solid longer-term record. All four of the large-blend ESG funds in the top 10, active and passive, outperformed the S&P 500 for the the first half of the year, and six of the top 10 ranked in the top quartile of their specific category.

It won't take much in the way of additional ESG fund flows to set a calendar-year record for the fifth consecutive year. Sustainable funds continue to perform well relative to conventional funds in a year of great uncertainty caused by the pandemic and other issues like the movement for racial justice and the upcoming election. These issues have underscored the need for investors to consider ESG-related risks in their portfolios and have affirmed the value of sustainability within the mainstream of investing.

This article is adapted from research that was originally published in Morningstar Direct's Research Portal. If you're a user, you have access. If not, take a free trial.

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.