ESG funds boosting active management

Environmental, social and governance (ESG) strategies are benefiting active fund managers as there have been no new inflows into active funds for two years until ESG strategies started taking off, according to data.

5i Research director, Mark Baker, said during a Calastone webinar that ESG had become a “real driver” of fund inflows for the funds management industry.

Between January and November this year, Baker said ESG equity funds saw inflows of US$30 billion ($42.3 billion). This meant that 60% of all the money that flowed into equity funds went into ESG funds.

“That $30 billion is three times as much as 2020 and 100 times as much as 2019. Some of this is about supply, there's lots more funds being launched, there is a huge marketing drive, and some of it is and that sort of driven awareness,” he said.

“I think it also reflects huge growing demand from consumers who want their investments to align with their values.”

He said ESG was benefiting active managers as until about mid last year traditional active equity funds had not seen any new net inflows for two years as all new money was going into passive funds.

“Then the ESG boom took off, and all of the new money went into ESG funds. So ESG is driving a big change,” Baker said.

However, Baker said the question was how managers were handling ESG given the potential for accusations of greenwashing.

“I think that explains why active fund management is winning the race, because the fund managers are having to do a lot of real in-depth screening of their own of companies to make sure that companies are meeting the standards that they consider necessary to meet the fund objectives,” he said.

“Until there is a sort of really well-developed scoring system that everyone buys into and everyone agrees on, active fund managers can continue to win this race while the ESG boom is underway.”

Baker noted ESG investing in Australia lagged behind the UK and Europe but that there were big net inflows this year with US$1.8 billion in inflows to ESG funds in Australia so far.