Banking turmoil dampens shine of ESG funds at end of strong Q1

By Tommy Wilkes and Patturaja Murugaboopathy

LONDON (Reuters) – Investment funds with environmental, social and governance (ESG) goals appear to be back in vogue in 2023, although the banking crisis that roiled markets last month removed some of the shine as investors withdrew cash towards the end of the quarter.

The previously booming ESG investment industry experienced a rough 2022, as soaring energy prices and a surge in global inflation eroded confidence in sustainable investing for some.

Below are several charts setting out how ESG funds have held up so far this year.

Net inflows

Before concerns over the health of banks sparked an investor rush to safety, funds marketing themselves as ESG-friendly had a strong start to 2023, with investors adding in more cash than they withdrew, according to Refinitiv Lipper data.

Across ESG debt, equity and multi-asset funds, net inflows hit $25.5 billion, the best quarter since early 2022, the data shows.

Still, with markets suffering another volatile spell and equity prices far below their peaks, total assets under management across all ESG funds stood at $33.3 trillion at end-March, versus a peak of $51.7 trillion at end-December 2021, according to the Refinitiv Lipper data.

Tech rebound

ESG equity funds enjoyed a quarter of net inflows, even after the March withdrawals, beating non-ESG equity funds, which lost money.

Analysts say ESG funds have been helped by a rebound in technology stocks that many funds hold, and policy initiatives such as the U.S. Inflation Reduction Act, which support the case for buying stocks that could benefit from a lower-carbon economy.

“The other real driver is the strong demand from asset owners and retail clients. There remains robust demand to be invested along ESG thematic ideas such as biodiversity and climate transition,” said Charles Boakye, ESG strategist at Jefferies.

GRAPHIC: Flows into ESG vs non-ESG equity funds – https://www.reuters.com/graphics/GLOBAL-MARKETS/znpnbjdodpl/chart.png MARCH MAYHEM

However, investors sold out of ESG funds in March when the collapse of Silicon Valley Bank sparked fears about the health of lenders and Switzerland’s second-largest bank, Credit Suisse, was forced into an emergency rescue.

ESG funds have historically owned bank shares because of their relatively lower carbon emissions, Boakye said, although versus traditional funds their exposure to banks is generally lower.

In a sign investors still seek refuge in traditional safe-haven bonds in times of stress, ESG debt funds suffered hefty March outflows while non-ESG bond funds sucked in cash.

Across the quarter ESG bond funds managed to attract more cash than they lost. GRAPHIC: Flows into ESG vs non-ESG bond funds – https://www.reuters.com/graphics/GLOBAL-MARKETS/egvbylneqpq/chart.png

Outperforming

Thanks to the rebound in tech shares and other sectors shunned in 2022, ESG equity funds outperformed traditional funds during the quarter.

That is in contrast to 2022’s underperformance. GRAPHIC: Performance of ESG vs non-ESG equity funds – https://www.reuters.com/graphics/GLOBAL-MARKETS/xmpjkjgxwvr/chart.png

(Reporting by Tommy Reggiori Wilkes and Patturaja Murugaboopathy; Additional reporting by Virginia Furness; Editing by Aurora Ellis)