Calastone, the global funds network, has revealed that UK-based investors have added £3.9bn into ESG funds since July 2017, a big increase from the £107m in the 33 months before that date, according to the firm's data.
Calastone said the data it tracked, which accounted for 373 UK funds that market themselves under an ESG label, showed trading volume in those offerings had increased threefold during those timeframes, to £16.5bn.
However, it added, there were far fewer sellers in those transactions post-July 2017 than there were between 2015 and 2017, meaning net fund inflows increased 37 times.
This higher profile for ESG funds and a growing focus on managing non-financial operating risk is driving demand higher too from institutional investors."
January 2020 saw record inflows to ESG funds. £395m was invested - meaning that January saw almost as much new money as all of 2015, 2016 and 2017 combined. Even March 2020, which saw unprecedented outflows from funds as the pandemic shattered sentiment and saw billions flood out of ‘regular' funds, ESG funds only saw £17m of outflows. Inflows returned in April to the tune of £334m.
ESG funds are still a niche category compared to regular funds (only around 3% of the total market), so a good way of comparing the inflows is to consider them relative to the value of funds under management. In the year to the end of March ESG equity funds garnered £5.10 per £100 AUM, compared to just 30p for regular equity funds. The dots on the charts below plot the size of inflows relative to assets under management.
In the 31 months to July 2017, £107m was invested into ESG mandates, with £6.4bn of two-way trading. In the subsequent 33 months, those figures had climbed to £3.9bn and £16.5bn respectively.
Further, Calastone's ESG Fund Flows Index has averaged 61.9 - meaning that buying activity was almost two-thirds larger than selling activity - the highest of all the index's categories, beating even passive flows at 59.
Edward Glyn, Calastone's head of global markets, said: "ESG investment struggled for a long time to gain real, mainstream traction among investors, perhaps thanks to a lack of understanding and consistency around what labels like ‘ethical investment' and ESG actually mean and therefore what the products offer. But it also reflected a perception that ESG investment may well entail lower returns."
"This is now changing. Fund management groups are investing heavily in the category in response to growing investor demand. This higher profile for ESG funds and a growing focus on managing non-financial operating risk is driving demand higher too from institutional investors."
Glyn added: "There is also no reason why returns should be lower, especially as governments and courts around the world increasingly expect corporates to bear the cost of poor practices - the vast class-action suits against tobacco companies are a case in point."