Sustainable investors hang tight amid selloff

Investors slashed contributions to funds in the first quarter amid rising rates and a bloodbath in the bond market, but sustainable funds held up better than conventional peers, new data from Morningstar reveals.

Contributions to Australasian funds tumbled 86% to $1.3 billion in the first quarter versus the end of 2021. Flows into sustainable funds fell less, declining 57% to $1.1 billion. 

The activity marks a dizzying reversal from the final quarter of 2021, where locally domiciled broad market funds raked in almost $10 billion, nearly four times the $2.8 billion for sustainable funds.

Erica Hall, an ESG analyst at Morningstar suggests sustainable investors may be more willing to stay the course because a purpose higher than short term profits guides them.

“Money may be stickier because its aligned to values. This could make investors more willing to take a longer-view and look through short term volatility,” she says.

A similar trend played out overseas. Inflows to global sustainable funds fell 36% to US$97 billion in the first quarter. New money into conventional counterparts slowed even more dramatically, shrinking 73% to US$138 billion over the same period. Only one quarter earlier, investors poured half a trillion US dollars into non-sustainable funds globally.

Sustainable fund flows were steadier despite a savage sell-off in growth stocks triggered by rising interest rates and inflamed by blowback from war in Europe and Covid lockdowns in China. Many sustainable funds are overweight emissions-light sectors such as technology and healthcare, which have been caught in the downdraft.

Once-shunned oil drillers and miners stormed up performance league tables in the three months to March. Lazard Select Australian Equity, Australia’s best performing fund in the first quarter, owns local energy and resource players including Woodside Petroleum (ASX: WPL), Rio Tinto (ASX: RIO) and coal miner Whitehaven Coal (ASX: WHC).

Australia’s two largest sustainability funds, Australian Ethical Balanced and BetaShares Global Sustainability Leaders (ASX: ETHI), delivered negative returns in the first quarter, down 5% and 11 respectively. Thematic play BetaShares Climate Change Innovation ETF (ASX: ERTH) tumbled 18%.

Australian fund managers kept new products on the shelf amid the market turmoil.

No new sustainable funds were launched domestically in the first quarter for the first time in records going back to mid-2019.

Assets under management for the Australasian sustainable fund sector declined 4.8% in the first quarter to $29 billion.

Morningstar’s sustainable funds category includes managed funds and exchange-traded funds that claim to focus their stock picking on sustainability, impact or include environmental, social and governance (ESG) factors. The report does not cover funds which consider ESG criteria but do not make them the focus of the investment process.