A More Favorable Outlook for Sustainable Strategies
Iain Snedden, senior investment specialist at Aegon Asset Management, believes that the market environment is becoming more favorable for sustainable strategies. Factors contributing to this outlook include falling inflation rates, declining interest rates, and undervalued growth stocks. With total “responsible” fund assets reaching $2.56 trillion as of November 2023, up from $2.35 trillion at the end of 2022, responsible funds continue to attract net new deposits compared to other fund categories.
LSEG Lipper data shows that global fund assets, excluding responsible funds, reached $52.6 trillion by November 30, following net inflows of $1.1 trillion during the year. Responsible funds still managed to outpace other funds in terms of attracting net new deposits relative to total asset growth.
One reason for sustainable fund outperformance is their underweight position in energy and utility sectors, which experienced underperformance in the latter half of the year due to sliding oil prices. For example, the $16.5 billion Vanguard FTSE Social Index Fund, which holds major tech companies like Apple, Microsoft, and Amazon, is a prime example.
Challenges and Resilience in the Sustainable Fund Landscape
While Europe continues to be the dominant region for sustainable assets, experiencing modest inflows, U.S. sustainable funds faced outflows of $10 billion through November. This outflow was largely attributed to a decision by BlackRock to remove an ESG fund from a target portfolio of funds followed by financial advisors, according to Morningstar.
However, pure-play sustainable funds, particularly those focused on cleaner energy companies, have encountered a tough year due to rising interest rates and inflation. For instance, the Invesco Solar Energy ETF is down 27% in 2023. Despite this setback, Sam Whitehead, Invesco’s EMEA ETF head of ESG product management, remains optimistic about the future of clean energy. He cited factors such as the fundamental demand for solar energy, its cost competitiveness, and supportive government policies as reasons for the positive outlook.
Riding Out the Backlash
Cal Smith, an attorney at King & Spalding who advises large company boards, expects the Republican attacks on ESG practices to persist. Nevertheless, he believes that many big companies that have already invested in workforce diversity and environmental initiatives will not change their practices. However, he also notes that companies may become less vocal about ESG issues to avoid being drawn into political controversies.
Despite recent dial backs in support for ESG-related shareholder resolutions by asset managers like BlackRock and Vanguard, the overall support rate for these resolutions in 2023 was still at 22% of votes cast, as reported by the Sustainable Investments Institute.