The momentum behind ESG fund launches has declined this year due to regulatory concerns and economic uncertainty, according to an analysis of Morningstar data by broker Jefferies.
The number of environmental, social and governance funds that were launched in the second quarter of 2023 fell by 68 per cent compared with the same period last year, according to a Jefferies note.
The broker analysed data covering around 7,800 open-ended and exchange traded funds, as well as approximately 900 funds that have been closed.
In the US, there were just 32 ESG funds launched in the first half of this year, excluding money market strategies. Outside the US, 138 ESG funds were introduced over the same period.
“We have already witnessed a swathe of launches in this space over the last few years as managers were looking to build their ESG ranges,” Schroders head of product development for UK and Europe Paul Truscott told Sustainable Views. “Some of this activity has completed and groups have likely moved to a more ‘normal’ launch pattern.
“Whilst regulation was a driver behind these launches, groups may now have grown more hesitant to launch until there is more certainty around requirements on a country-by-country basis,” he continued, adding that the macroeconomic environment “could also foster a general slowdown in fund launches”.
Retail flows into ESG funds have been soft in 2023. US ESG funds recorded outflows of around $0.5bn in the second quarter, following an average of $5.5bn in inflows over the previous eight quarters.
Active ESG funds made up the majority of outflows, while passive ESG flows were “roughly flat” over the quarter, Jefferies noted.
Of the top 15 ESG fund managers by assets under management, Parnassus experienced the highest outflows during the quarter, sitting at $680mn, followed by Invesco, which recorded outflows of around $390mn.
Parnassus and Invesco have been contacted for comment.
Non-US ESG funds, meanwhile, posted inflows of $16bn during the same period. This was well below the average inflows of $72bn over the prior eight quarters.
The proportion of ESG funds that are outperforming their benchmarks has also fallen. Just 36 per cent of US ESG funds performed better than their respective benchmarks in the second quarter year on year, which is down from 48 per cent in the first quarter.
Outside the US, around 30 per cent of ESG funds outperformed their respective benchmarks, compared with 42 per cent in the same period last year. Jefferies said this level of underperformance was similar to that recorded in the previous quarter.
“The recent slowdown of ESG fund launches appears to be influenced by prevailing economic and regulatory concerns in the US,” platform Valutico chief executive Paul Resch told Sustainable Views.
He added that among Valutico’s client base, “we observe a mix of views on the role of ESG in investing, with some scepticism on the tangible impact of ESG metrics on financial performance”.