ESG’s . . . OK

As David Byrne kinda sing-talked: “Say something once, why say it again?”.

So, rather than actually writing words ourselves, here’s mainFT’s sister pub Ignites Europe from a few weeks ago:

Asset managers have been dropping the word “sustainable” from the names of funds in response to increasing regulatory and reputational concerns.

Forty-four sustainable funds removed the label from their brand name during the first half of 2023, in contrast to 2022, when 99 funds added “sustainable” to their name, according to data from consultancy Broadridge.

And here’s Bloomberg a few days before that:

BlackRock Inc. and other money managers spent years rolling out sustainable funds, seeking to capitalize on surging interest in ESG investing. Now they’re abandoning an increasing number of those products in the US amid political backlash and investor scrutiny.

Altogether, it’s a gloomy picture for ESG. But how bad, or unbad, are things overall? Here’s Barclays today:

Recent media reports have painted a downbeat picture of demand for ESG funds, suggesting that ESG fund closures are at record high levels and that asset managers are removing ESG-related terms from funds due to regulatory and reputational concerns.

To see if this is indeed the case, we analysed demand for ESG funds via flows, closures, launches and name change data. Given the importance of context when analysing ESG fund data dynamics, we also examined how ESG funds compare to non-ESG funds and how YTD figures compare to historical trends. The underlying data show a more positive picture of the state of ESG demand than recent media reports would suggest, in our view. We did see signs that the pace of growth is slowing, but that could potentially be attributed to a natural maturing of ESG investing.

Analysts Maggie O’Neal, Charlotte Edwards, Dipika Haresh Mirchandani and Magesh Kumar Chandrasekaran found that — in terms of raw headcount — the rate of closures are indeed elevated: 72 ESG equity and fixed income funds have closed so far this year, more than the annual total for the previous three years. But in terms of the assets under management of the closing funds, things are merely meh:

Delving deeper, they found that overall flows into ESG had remained positive despite the high number of closures — although the heady levels of 2021 now look pretty far away:

Fund launches, meanwhile, have “markedly declined” compared with the previous years…

…but the analysts suggest this may be a case of an ebbing tide lowering all ships (not really how ships work, bad metaphor, sorry):

To determine whether the lower level of ESG fund launches is unique to this part of the market, we looked at the percentage of overall fund launches that were ESG funds. YTD, there have been 875 funds launched in the universe we track versus c.1,600 last year. In percentage terms, c.35% of fund launches YTD have been ESG funds versus c.45% in both 2021 and 2022 making the decline in ESG fund launches versus all equity and fixed income funds in aggregate less stark that the absolute number might suggest.

Barclays is also sceptical about the name-changing trend that has been observed:

We found that significantly more equity and fixed income funds added ESG-related terms to their fund names over the past 18 months than removed them. In total, around $90bn of AUM added an ESG-related term, versus just $6bn that removed an ESG-related term. We also found $34bn of AUM changed between one ESG-related term and another.

Overall, not a bad set of results for ESG. Which is just as well, because the ratings providers essential to the sector don’t seem to be up for much of a fight, as mainFT’s Kenza Bryan reported last week:

Fearing that ESG is becoming an easy target for attacks, amid the growing political disputes over net zero policies in the US and elsewhere, executives say some providers are setting up a trade association for the first time.

By positioning themselves as neutral conduits for information, with no influence over the actual investment decisions around the net zero transition, some in the industry hope to avoid getting tangled up in the climate culture wars.

Data providers will increasingly argue in public that “this product does nothing to change the world,” says Stewart at Morningstar. “It is more an expression of your own values and preferences.”

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