Research Shows Investors Smitten by Regional or Sector-focused ESG Funds

According to data released by global funds network Calastone, nine out of every ten pounds invested in equity investment funds in July went into an environmental or ethical fund – writes Kate James

Environmental social and governance (ESG) equity funds accounted for 90% of July’s equity fund inflows; with net inflows of £995 million, this was the second-best month on record for ESG funds.

Overall, inflows into equity funds were lower compared to previous months; July’s net inflow into equity funds was £1.12bn which was slightly below June’s £1.2bn and only around half of the average monthly inflow over the previous six months of £2.05bn.

Passive fund inflows also saw a large decline in July, with actively managed funds taking the majority of investor money; active equity funds saw net inflows of just over £1bn, while passives managed just over £40 million which was a steep decline from previous months when in both May and June, passive funds took in more than £500m.

Index funds had their second-worst month in over five and a half years, with inflows down 90% in July when compared to their long-run monthly average.

By contrast, active equity funds held up relatively well; July’s inflows totalled £1.08bn, which Calastone believes was partly thanks to strong demand for ESG strategies.
 

ESG goes sectoral

 
Calastone’s data also showed investors buying ESG funds in a wider range of regions than in the past. For some time, the majority of cash targeting ESG funds has been going into global equity funds – in 2020, 81% of ESG equity fund inflows were to this category.

However, this share is falling; in the year-to-date, ESG global equity funds accounted for two-thirds of ESG inflows, dropping to a record low of 52% in July, with investors increasingly opting for regional or sector-focused ESG funds.

Thus far this year, sector-based funds investing in areas such as sustainable energy, water, general environmental, and infrastructure have benefited from £764m in inflows which is two-thirds of all cumulative inflows since 2015. Demonstrating the growing popularity of such funds, in July, one pound in every four invested in ESG equity funds was sector-based.

Calastone analyses more than a million buy and sell orders each month, tracking flows in and out of investment funds from financial advisers, platforms and institutions; more than two-thirds of UK fund flows by value pass across its network every month