End of Week Notes
On fund flows, defining ESG funds, BlackRock, and the loss of an SRI pioneer
A Record-Breaking Quarter for Global Sustainable Fund Flows
Global sustainable fund flows set record in Q4
We put out our Morningstar “Global Sustainable Funds Flows Report” this week, authored by my London colleagues Hortense Bioy and Elizabeth Stuart. Here are the key takeaways:
- Driven by increased investor interest in ESG issues and sustainable investing, sustainable funds notched a record-breaking quarter in terms of flows, assets, and product launches.
- Global inflows into sustainable funds were up 88% in the fourth quarter of 2020 to $152.3 billion.
- Continuing to dominate the space, Europe accounted for almost 80% of these inflows. The United States took in 13.4%, up slightly from 12% in the last quarter, while flows in the rest of the world also grew, clocking in at $11.1 billion for Canada, Australia and New Zealand, Japan, and Asia combined. This is up from $9 billion in the second quarter.
- Assets in sustainable funds hit a record high of $1,652 billion as of the end of December, up 29% from the previous quarter.
- Product development in the fourth quarter hit an all-time high, with 196 new offerings, including 37 in countries outside of Europe and the United States. Asset managers also continued to repurpose and rebrand conventional products into sustainable funds, with at least 250 such funds in Europe.
Download the full report here:
A record quarter and year for sustainable fund flows in the U.S.
While still only a fraction of the flows we see in Europe, flows into U.S. sustainable funds also hit record highs in the fourth quarter and for the calendar year, breaking the $20 billion mark for the quarter and the $50 billion mark for the year.
For context, the previous calendar-year high for ESG fund flows was $21.4 billion in 2019. And the previous quarterly high for ESG fund flows was $10.5 billion set in 2020’s first quarter.
What are sustainable funds, anyway?
As noted in the global flows report, more sustainable funds are being launched than ever before and many existing funds are retooling to focus on ESG. So how do we get a handle on this rapidly growing universe in the absense of established standards?
It’s not easy, but also not impossible. We have been combing through fund prospectuses to find those offerings that clearly hold themselves out to be sustainable investments. Most reference the fact that ESG concerns are central to their investment process and portfolio outcomes. In the U.S. this is usually readily apparent from reading the “Principal Investment Strategies” section of their prospectuses. Many other funds have begun including a mention of ESG somewhere in their prospectuses, but in context it is usually quite clear that what they mean is that ESG may be considered in some of their investment decisions, but it is only one consideration among many and it is not a central feature of the strategy. We do not include those funds in our lists of sustainable funds.
That said, we are not basing a fund’s membership in the sustainable funds universe on how well they are doing their ESG analysis or on their portfolio outcomes.
Morningstar does have an independent assessment of that in its Sustainability Rating. The “globe” rating is based on the ESG Risk ratings of a fund’s portfolio holdings over the previous year relative to category peers. The best 10% of funds in a given category receive 5 globes. The next 22.5% receive 4 globes. The middle 35% receive 3 globes. The next 22.5% receive 2 globes, and the worse 10% receive 1 globe.
It turns out that the vast majority of self-described sustainable funds receive 4 or 5 globe ratings, which for me is one indicator that most are doing what they claim. It’s not the be-all end-all, though, because the globes don’t capture the impact dimension of sustainable investing, whether that is judged by holdings or by fund/asset manager stewardship activities.
iShares dominate ESG flows in U.S.
I’ll have more to say about BlackRock Chairman and CEO Larry Fink’s annual letters to company CEOs and clients next week, but 2020 marked the year in which BlackRock came to really dominate sustainable fund flows via its expanding iShares suite of ESG ETFs.
Those ETFs alone attracted more flows in 2020 than the entire U.S. sustainable-funds universe did in any previous calendar year. So it is good to see BlackRock further deepening its commitments this year, especially in the area of proxy voting, where the firm has lagged in the past but now says it intends to more often support shareholder proposals related to ESG issues and to vote against directors of companies that fail to make progress in key areas like climate and gender equity. I hope they add racial equity and political/lobbying expenditure disclosures to that list.
Jack Brill, author of Investing from the Heart
The first book I read about “socially responsible investing” was Investing from the Heart, written by Jack Brill, who died last week at age 89. The first sentence still resonates for me today:
Here is a tribute posted by his friend and colleague Michael Kramer:
Jack Brill, a pioneer of the socially responsible investment (SRI) industry, passed away last week at age 89. As one of the earliest SRI advisors in the ’80s, Jack was a passionate advocate and known for his heartfulness and thought leadership. He wrote one of the first books on the field, Investing from the Heart (Crown, 1992). From this Jack created The Heart Rating, the first and most rigorous ESG rating system of SRI mutual funds, now in its 29th year and published at https://www.naturalinvestments.com. From 1993–2000, Jack participated in a NY Times study that compared his SRI portfolio to 4 other non-SRI advisor portfolios; after 28 quarters of articles comparing the various portfolios, his came within 17 basis points of the leading average annual return and demonstrated the financial efficacy of SRI. With his son and co-advisor Hal Brill and Green Money publisher Cliff Feigenbaum, Jack co-authored Investing With Your Values: Making Money and Making a Difference (Bloomberg, 1999 and New Society, 2000). The book generated a lot of interest in the field and led Jack and Hal to form Natural Investment Services with Michael Kramer in 2000. With the formation of Natural Investments LLC in 2007, Jack retired to San Luis Obispo, CA, where he remained very active even after being diagnosed with Parkinson’s disease. He was very involved with Carol Walton, President of the Parkinson Alliance, and managed to persuade some former students at Cal Poly San Luis Obispo to develop his invention that helps people with Parkinson’s to walk. Here he is on the TV news modeling the effective use of his concept, now a start-up company: https://www.youtube.com/watch?v=mtyEkzSJ1p4&feature=youtu.be. Jack was also Chair of the Social Action Fund of his local congregation.
Everyone who got to be around Jack appreciated his warmth, candor, and humor. He will be cherished in the hearts of all who knew him. Donations can be made in Jack’s honor to:
Parkinson Alliance PO Box 308, Kingston, NJ 08528 https://www.parkinsonalliance.org/donatenow/general-donation/
Congregation Beth David: Social Action Fund 10180 Los Osos Valley Road, San Luis Obispo, CA 93405
