ESG equity funds, known for prioritizing environmental, social, and governance criteria, experienced a significant outflow of funds in May, with net flows of minus £304 million. This marked only the second month of net selling in this area in over five years. This departure from the previous trend of substantial inflows raises questions about the factors influencing investor sentiment and the potential impact on the ESG funds industry.
The appeal of ESG investing has been a powerful tool for the funds industry, attracting substantial inflows in recent years, with a net inflow of £6.7 billion in 2022 and £11.2 billion in 2021. However, the latest data reveals a notable shift in investor behaviours. Instead of making new investments, a higher number of investors chose to sell their holdings in ESG equity funds. This unexpected change in sentiment raises concerns about the factors influencing investor decisions and the potential impact on the ESG funds industry.
In May, UK investors displayed caution by favouring money market funds, marking the highest backing rate since the failed ‘mini-budget‘ of the previous year, according to Calastone, a funds network. They contributed a net inflow of £419 million ($521 million) to money market funds, the most significant amount since October 2022.
Also, UK investors invested 318 million pounds in the bonds market during the month, even due the pace slowed due to increased volatility dampening demand. This decision came after a volatile period in global banking. The preference for money market funds was driven by savers seeking better returns and reduced risk following a series of bank failures.
Edward Glyn, head of global markets at Calastone, noted that money market funds are among the least risky assets as they invest in bonds with short maturities. Recent instabilities in the US banking system have reminded investors of the risks associated with exceeding insured thresholds for bank deposits, driving wealthier individuals to opt for money markets as a secure place to store surplus cash.
A recent survey conducted by US broker Charles Schwab among 1000 UK investors revealed a decline in the appeal of companies with strong ESG credentials. Since February 2021, the interest among UK investors dropped has by 7.0%. The ongoing cost of living crisis and the prioritisingmaximising returns over sustainable investing were cited as contributing factors. The survey also found a decline of 6% in the number of UK investors considering ESG when making new investments since December 2021.
Demographics play a role in ESG investing, with Boomers and GenX being the least likely to take environmental, sustainability, and social governance issues into account when managing their money. In contrast, 23% and 32% of Millennial and GenZ investors factor in ESG when making investment decisions.
Lackluster returns may also be a factor impacting the popularity of ESG investing. Over the past two years, the S&P 500 ESG index returned -0.14%, while the vanilla S&P 500 index gained over 4.0%. The S&P 500 Information Technology sector performed even better, returning almost 18% during that period. This suggests that investors may have achieved better returns by holding the S&P Info-tech sector rather than a dedicated ESG fund.
Additionally, there has been a recent trend of dedicated ESG investing platforms reducing their services or shutting down completely. Clim8 announced its permanent closure on May 30th, while Tulipshare had to pivot into a shareholders’ rights and voting app due to its inability to raise fresh working capital. Despite the challenges the ESG investing industryfaces, UK clients still have a range of options that incorporate sustainability ESG factors into their strategy and operations. Financial companies, such as Moneyfarm and InteractiveInvestor, offer ESG portfolios and thematic investments and services like Interactive Brokers’ carbon offset service.
The May data reflects the cautious approach of UK investors, who chose money market funds for their perceived lower risk in a period of global banking volatility. However, ESG-focused equity funds faced challenges, while bond market investments continued at a slower rate. The shifting investment preferences highlight the influence of factors such as market conditions, risk perceptions, and the search for higher returns on investment.To achieve the best returns while considering ESG factors, investors need to be flexible and utilize the various tools and resources available to them.
