ESG ‘gold rush’ as funds accounted for 90 percent of July equity fund inflows

ESG funds accounted for 90 percent of inflows in July as the ‘ESG gold rush’ continued, according to Calastone’s latest Fund Flow Index.

ESG inflows rose to £995 mn ($1.37 bn) in July – representing 89.5 percent of equity fund inflows for that month and marking the second-highest performance on record for ESG equity funds. Most of that capital was also actively managed, notes Calastone.

This comes even as July saw a drop in equity fund inflows ‘as investors grew more concerned over global growth and the high value of stock markets around the world’.

According to Calastone’s latest Fund Flow Index, net inflows to equity funds fell to £1.12 bn in July – around half the average monthly inflow over the last six months (£2.05 bn).

‘Most of the impact was felt by index funds, with strong inflows into active funds, primarily on account of continued demand for ESG equity funds – which were major winners among investors,’ says Calastone in a statement announcing the results.

In fact, more than nine-tenths of ESG capital flowed into active equity funds, ‘helping explain why active funds overall held up so much better than their passive counterparts,’ explains the firm.

Passive fund inflows in July were actually 90 percent lower than their long-run monthly average, notes Calastone, with inflows falling to just £39 mn – marking the second-worst month in more than five-and-a-half years.

Although the firm describes inflows to ESG funds as a ‘gold rush,’ it also notes some shifting trends: while ESG equity fund flows are currently concentrated in global equities, the dominance of these funds ‘is fading’ as other categories, specifically specialist sector funds, attract greater investor attention.

According to Calastone data, inflows to ESG equity funds have totaled £11.6 bn since 2015 – but ‘astonishingly’ 99 percent of that capital has flowed in since August 2019.

‘The vast majority of this cash has been devoted to global ESG equity funds,’ it says. In 2020, for example, 81 percent of ESG equity fund inflows were to this category.

But now things are starting to change. ‘Investors are now increasingly fine-tuning their ESG fund purchases,’ finds Calastone. Inflows to global ESG equity funds are notably lower so far this year, at just two thirds of new ESG equity capital year to date. For July alone, that figure dropped further to 52 percent – the lowest ever reading.

‘ESG equity funds with a more targeted geographical or sector focus have begun to take a greater share of new inflows,’ says Calastone. ‘For example, this time last year ESG UK equity funds had still not made up for years of steady outflows pre-2019, but inflows have now picked up sharply, totaling £607 mn year to date. In July, £1 in every £12 flowing into ESG equity funds was devoted to those with a UK focus.’

It adds that ESG sector funds, which Calastone describes as ‘a fairly new category which mainly comprises sustainable energy, water, general environmental, and infrastructure specialists,’ have been ‘particular winners’ seeing two thirds of all their cumulative inflows since 2015 so far this year (£764 mn in inflows).

In July, £1 in every £4 flowing into ESG equity funds has been to this category, says the firm.