Outlook 2024
34
Outlook 2024 Reports of the death of ESG are grossly exaggerated. In the real world, the undercurrent of Responsible Investing continues to strengthen among investors, while supporting regulation is successively rolled out in numerous jurisdictions. While robust debate about the ESG acronym continues in the political space – especially in the United States – and much of the early hype is receding, sustainability factors are steadily entering the mainstream of investing. This means increasing demands on asset managers, as the focus shifts to the substance and integrity of the sustainability-related claims made.
Headlines in the last few quarters have been heavy with re- ports of outflows from ESG33 funds and investment strate- gies. Less publicised is the fact that global fund asset in funds deemed “sustainable” by Morningstar34 rose from just over 2,5 trillion at the end of 2022 to nearly 3 trillion by end 2023. None- theless, while the last quarter of 2023 saw the first outflows from SFDR Article 9 funds, as well as from the Article 8 catego- ry, assets in Article 8 and 9 funds in fact grew, reaching a new record share of almost 60% of European fund assets. The difficult macroeconomic and geopolitical environments and the competition from higher-rate bank deposits are all part of the explanation why investors are currently less enthusiastic for investment funds in general. These factors have also affected the ESG segment of the market. Setbacks to renewable energy
stocks are also likely to have played a pivotal role. But two other factors particular to the ESG space should not be overlooked:
Firstly, the higher rate environment carries a shift towards fixed in- come for those investors who stay in the market – and a sizeable portion of fixed income funds are in single-country government bonds. While these are typically consistent with investment strat- egies focused on avoiding harm (a prevalent concern of sustain- ability-minded investors), they do not lend themselves easily to ESG methodologies or classification. Thus, a shift towards bonds would superficially appear as reduced interest in ESG. Secondly, data from Europe collected by Morningstar shows that the ESG funds with the largest outflows were Article 8 funds with no commitment to Sustainable Investments as defined under the
33) The term ESG is used here as a neutral catch-all for investment strategies variously described as ESG, Responsible, SRI or Sustainable. 34) Morningstar: SFDR Article 8 and Article 9 Funds: Q4 2023 in Review, and Morningstar: Global Sustainable Fund Flows: Q4 in Review, both January 2024.
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