Environmental and climate-focused funds dominate ESG investing

From January to October, mutual funds and exchange-traded funds specializing in environmental topics attracted far more cash than ESG funds that focus on other sustainability areas, fund-flow data from Morningstar shows.

The attraction to green funds has been fueled, in part, by an increased focus on climate change, an issue that has received more exposure this month with the COP26 global summit on climate change in Glasgow.

“The global media pays a lot of attention to environmental issues, and investment flows mirror that,” says James Penney, chief investment officer at Tam Asset Management in London. “At COP 26, every headline from here to Australia was dominated by what we’re doing about climate change.”

According to Morningstar, funds with “low-carbon/fossil-fuel-free,” and “environmental” characteristics had inflows of $28.33 billion and $13.53 billion, respectively, from January to October. (Funds can have multiple characteristics in Morningstar’s analysis, so some flows from individual funds appear more than once.)

‘Green’ short for nongreen fund

Those strong eco-themed flows contrast the more modest popularity of funds with “community development,” “other impact themes” and “gender and diversity” features, which generated $7.53 billion, $5.99 billion and $5.12, respectively, for 10 years. Billion attracted. month.

“Sometimes, the only focus on the environment comes at the expense of social and governance factors,” says Jake Wako, director of ESG investment and global investment management at Thornberg Investment Management. Environmentally-focused funds edge out other ESG funds in part because green-themed funds can use quantitative metrics to guide their investments and may display their focus more than funds focused on social issues or governance. who sometimes use more-subjective measures, he says.

In addition, the relative lack of interest in funds focused on social issues has led to a smaller range of investment products in that area. The three Morningstar categories of gender, other impacts and community development each had fewer than 100 available funds at the end of October, while those with a low-carbon/fossil-fuel-free specialty had 165 funds.

Still, it could be a temporary shortfall, at least in some areas, as Wall Street responds to shifting interests among investors. “Gender diversity as an investment topic is gaining traction, and we’re seeing more products coming to market,” says Todd Rosenbluth, head of ETFs and mutual-fund research at CFRA. In the first 10 months of the year, the number of gender-and-diversity funds rose nearly 9% from 46 to 50, Morningstar data show.

Governance is still a mystery to many

Funds focused on corporate governance, meanwhile, may be less popular than other ESG funds because it is not easy for many investors to understand governance issues as ESG topics. “Governance is not an investable subject like other sectors,” says Hortense Bio, global director of sustainability research at Morningstar.

Governance matters include how well the company is managed, the diversity and independence of the board, and the amount and manner of executive compensation. Superior governance is often an attractive feature for many stock pickers. However, investing using governance as the sole feature is still not easy, says Ms. Bioy.

mining still popular

For comparison, natural-resource funds were included in Morningstar’s fund-flow analysis. These funds typically hold shares in fossil-fuel and mining companies. Most investors would say that this is the opposite of green investing. Such funds have attracted inflows of $12.80 billion since October this year.

The rise in commodity prices is the reason for such funds to remain attractive. For example, crude oil and copper have staged strong rallies last year and this year the global economy emerged from the Covid-19 pandemic lockdown.

In addition, the world still relies on the extraction of minerals to provide the materials needed for clean energy. Solar power and electric vehicles both require massive amounts of minerals, says Arthur Hogan, chief market strategist at National Securities Corp. “While all this ESG investment moves us in the right direction of trying to slow global warming,” he says, “there will be a transition and it will take some time.”