Analysis: Money before climate; Market downturn spurs ESG fund exodus

NEW YORK / BOSTON, Nov 11 (Reuters) – Funds adhering to environmental, social and corporate governance (ESG) principles have been hit by unprecedented outflows in the market downturn, as investors prioritize capital preservation over objectives such as tackling climate change.

ESG, a classification applied to fund assets currently worth an estimated $6.5 trillion, is being tested by a drop in market value fueled by concerns that the central bank hiking interest rates to combat rampant inflation will trigger an economic recession.

Investors who invest in ESG funds may pose a challenge to governments seeking to enlist them in the fight against climate change. Policymakers at the COP27 climate talks in Egypt are trying this week to secure more financing from the private sector to help curb carbon emissions.

Data from the research service Refinitiv Lipper shows that funds of shares, debt and other types of assets dedicated to responsible investment sent global net outflows of $ 108 billion this year until the end of September, the first time that investors withdrew money from them during a long period since Refinitiv began tracking them in late 2017.

Moreover, investors withdraw money from responsible investment funds – defined as such because they use criteria such as ESG or religious values ​​in their investment decisions – faster, relative to their size, than broader market funds for all but the two months of 2022 to September , the data shows.

Refinitiv Lipper analyst Otto Christian Kober said the ESG fund industry’s heavy exposure to the technology sector, which is seen as more environmentally friendly than other industries, is becoming a drag amid fears of an economic slowdown. Its respect for fossil fuels as the rally in energy prices weighs heavily on its financial performance.

“In the COVID-19 pandemic, investor sentiment was driven by ESG and seemed to sink energy prices. Sentiment reversed when natural resources or energy prices started to rise again and people said ‘we need that return,'” Kober said.

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To be sure, investors in some areas show more loyalty to ESG than others. US investors, for example, have stuck with responsible investment funds for more years while their European counterparts have fled, Refinitiv Lipper data shows.

Reuters Graphics

The extent of investor flight also depends on how data providers define ESG funds. Morningstar Inc (MORNING.O)which categorizes $2.24 trillion worth of funds as “sustainable” by applying more restrictive criteria than Refinitiv Lipper, reported a 71% year-on-year drop inflows to $139 billion for the year through September.

return the fortune

The recent decline shows that ESG investors’ attention to the needs of the planet and society does not make them indifferent to poor financial results when their portfolios underperform, investors and analysts say.

Only 31% of actively managed ESG equity funds beat their benchmark in the first half of 2022, compared to 41% of conventional funds, according to Refinitiv Lipper.

This represents the reversal of fortunes compared to the previous year. In 2021, 40% of actively managed ESG funds beat their benchmarks, almost as well as conventional funds. In 2020, actively managed ESG funds are doing better; 57% of them beat their benchmarks, while only 43% of conventional funds did.

One active ESG fund that experienced the downturn is the Parnassus Core Equity fund (PRBLX.O). It had net inflows of $464 million during the third quarter and a negative total return of 21.47% for the 12 months to Nov. 9, just 30% of peer funds, according to Morningstar.

Joe Sinha, the chief marketing officer of the parent Parnassus Investments, said that the firm’s avoidance of fossil fuels has hurt returns and appealed to some investors, but added that some outflows were due to clients moving to other products in the firm.

“People who sell tend to be more trigger-happy based on recent performance,” says Sinha.

It is possible that the market trend will come in favor of the ESG fund portfolio in the coming months. Energy prices may fall amid an economic slowdown and bargain hunters may spend their money buying some battered tech stocks.

“You usually see when we get close to the bottom of the market people tend to chase performance,” said Jens Peers, CEO and CIO at Mirova US, the sustainable investment arm of French bank Natixis. (BFCEp.PA).

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Reporting by Ross Kerber in Boston and Isla Binnie in New York Editing by Greg Roumeliotis and Lisa Shumaker

Our standards: Thomson Reuters Trust Principles.

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