NEW YORK/BOSTON, Nov 11 (Reuters) – Funds adhering to environmental, social and corporate governance (ESG) principles have been hit by unprecedented capital outflows in the market downturn as investors favor preserving the capital to objectives such as the fight against climate change.
ESG, a classification applied to fund assets currently worth an estimated $6.5 trillion, is being tested by falling market values fueled by fears that central banks will raise interest rates. Interest in fighting runaway inflation does trigger an economic recession.
Investors turning to ESG funds could pose a challenge to governments looking to engage them in the fight against climate change. Policymakers at the COP27 climate talks in Egypt are this week trying to secure more private sector funding to help cut carbon emissions.
Data from research service Refinitiv Lipper shows that equity, debt and other asset types dedicated to responsible investing saw global net outflows of $108 billion this year through the end of September , the first time investors have taken money out of them for such a long time since Refinitiv began tracking them in late 2017.
Moreover, investors withdrew money from responsible investment funds – defined as such because they use criteria such as ESG or religious values in their investment decisions – more quickly, compared to their size, than the broader market bottoms for all but two months of 2022 through September, the data shows.
Refinitiv Lipper analyst Otto Christian Kober said the ESG funds industry’s heavy exposure to the tech sector, which is seen as more environmentally friendly than other industries, has become a drag on the middle. fears of an economic slowdown. Its aversion to fossil fuels during a rise in energy prices further weighed on its financial performance.
“During the COVID-19 pandemic, investor sentiment was driven by ESG and perhaps falling energy prices. energy started to rise again and people were like ‘we need this back,'” Kober said.
Certainly, investors in some regions show more loyalty to ESG than others. US investors, for example, have stuck with responsible investment funds for more than a year as their European counterparts fled, according to data from Refinitiv Lipper.
The extent of investor flight also depends on how data providers define ESG funds. Morningstar Inc (MORN.O), which classifies $2.24 trillion in funds as “sustainable” using more restrictive criteria than Refinitiv Lipper, reported a 71% year-on-year decline in inflows to $139 billion for the year until September.
REVERSAL OF FORTUNES
The recent recession demonstrates that ESG investors’ attention to the needs of the planet and society does not make them indifferent to poor financial returns when their portfolios underperform, investors and analysts said.
Only 31% of actively managed ESG equity funds beat their benchmarks in the first half of 2022, compared to 41% of conventional funds, according to Refinitiv Lipper.
This represents a reversal of fortune from previous years. In 2021, 40% of actively managed ESG funds beat their benchmarks, almost as well as conventional funds. In 2020, actively managed ESG funds did even better; 57% of them beat their benchmarks, while only 43% of conventional funds did.
An active ESG fund that has suffered from the recession is the Parnassus Core Equity fund (PRBLX.O). It posted net outflows of $464 million in the third quarter and a negative total return of 21.47% for the 12 months to Nov. 9, beating just 30% of peer funds, according to Morningstar.
Joe Sinha, chief marketing officer of the fund’s parent company Parnassus Investments, said the company’s avoidance of fossil fuels had hurt returns and the appeal of some investors, but added that some of the exits were due switching customers to other products within the company.
“People selling tend to be more happy with the trigger based on recent performance,” Sinha said.
Market trends may favor ESG fund portfolios in the coming months. Energy prices could fall amid an economic slowdown and bargain hunters could rush to buy some of the struggling tech stocks.
“You usually see that when we’re already close to the bottom of the market, people tend to look for performance,” said Jens Peers, CEO and CIO of Mirova US, a sustainable investment arm of French bank Natixis (BFCEp .PA).
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Reporting by Ross Kerber in Boston and Isla Binnie in New York Editing by Greg Roumeliotis and Lisa Shumaker
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