Passive environmental, social and governance (ESG) funds are struggling to gain a foothold with 98% of Australian ESG flows going into active products.
According to Calastone analysis of over 500,000 buy and sell orders in Australia since January 2019 and found passive ESG funds were largely sidelined by Australian investors. This was in contrast to markets like the UK where ESG fund usage was more advanced.
The Global Fund Flow report said: “Passive ESG funds are beginning to compete more successfully for investor attention in some other markets like the UK, but they have yet to make a real impact.
“ESG standards are still evolving so passive strategies will struggle to establish for the time being. Almost all the ESG equity cash invested by Australians (98%) went into actively managed funds in 2021.”
However, there was more interest in fixed income ESG funds where Australia bucked the wider trend.
“In Australia, $4 in every $10 inflows to fixed income funds last year were devoted to ESG strategies. In this respect, Australian investors are ahead of those elsewhere.”
Net new capital invested in ESG equity funds rose by 338% to $3 billion.
Teresa Walker, managing director, head of Australia and New Zealand at Calastone, said: “Inflows to ESG funds have grown exponentially, following trends we are seeing elsewhere in the world and we expect this to continue in 2022 as economies reopen.
“In some markets, ESG equity funds are taking new capital market share from traditionally managed funds, a trend that may begin to feature in Australia’s fund market. Nevertheless, the value of ESG funds under management is still dwarfed by traditional categories, so there is a lot of headroom to grow further, which is good news for active fund managers.
ESG funds also tend to invest globally, so the ESG boom in Australia is likely to boost the international diversification of Australians’ savings which have typically favoured domestic investments. In 2021, for example, three fifths of ESG cash flowed into global ESG funds, compared to less than half the cash devoted to non-ESG equity funds.”
