Anti-ESG sentiment drove equity fund flows into negative territory last year, new Calastone data shows, in a sharp reversal of recent trends.
The Calastone report says funds transacted across its global network carrying environmental, social and governance labels saw net outflows of US$10.2 billion in 2023 in a pattern repeated “in every one of our territories”.
“Indeed, if we exclude ESG funds, then overall equity fund flows would have been positive in 2023 to the tune of $3.0bn – a modest amount, certainly, but the clear distinction between ESG and non-ESG and the sudden change in behaviour are startling,” the study says.
“… Whether it’s because people don’t really believe companies are walking the ESG walk, or are losing faith in the fund management industry’s ability to effectively differentiate between companies that meet the highest standards and those that do not, there has been a clear break in the trend – 2023 is the first year since at least 2019 that non- ESG equity funds have attracted more capital than ESG.”
By contrast, ESG share funds traded over Calastone pipelines during the three years to the end of 2022 recorded net flows of US$51.2 billion, equating to six-times the amount flowing to regular equity products over the same period.
“About 80% of this was actively managed and proved a boon for active fund managers, offsetting outflows from traditional actively managed funds by a factor of three to one,” the report says.
In fact, flows into active funds in 2021 during peak ESG enthusiasm outgunned passive counterparts by about three-times before falling behind again in 2022: last year indexers pulled even further ahead.
“Notably, index tracking funds were strongly back in favour in 2023. They attracted inflows of $20.1bn, while active funds shed $27.2bn,” Calastone says.
“… Over the last five years, passive funds are easily ahead. Investors have bought a net $53bn of passive funds, and just $1.7bn of active ones.”
But total funds under management across all asset classes in 2023 retraced losses of the previous year, led by a big bounce in equity markets and positive net flows into bond products.
Calastone counted over US$22 billion of net flows into fixed income funds last year with mixed strategies also registering about US$5 billion of flow-based gains as European investors piled into diversified offerings.
The report, authored by Calastone head of global markets, Edward Glyn, also highlights that flow trends almost invariably reflect investor buying behaviour rather than selling activity.
“Even if there is little or no change in selling activity, that can quickly turn net fund flows negative. This is chiefly because net fund flows are the wafer-thin difference between large volumes of buy and sell orders,” the study says. “For example, we have processed over $2.6 trillion of equity fund trades in the last five years alone – but the net fund inflow in that time has been just $51bn, under 2% of the total transacted.”
Since 2019, the fund order processing specialist, has channelled US$5.9 trillion of transactions – including US$1.3 trillion last year – through its network of 4,000 plus clients in more than 55 jurisdictions.
Calastone recently appointed Marsha Lee as head of Australasia, replacing Teresa Walker. The group provides services to many of the adviser-focused fund platforms in NZ including Apex and the NZX-owned Wealth Technologies.