What do ESG flows and performance tell us? 

The growing threat of climate change, social inequalities highlighted by the pandemic, and racial justice issues within the U.S. have led to a growing focus on ESG investing in recent years, leading many to think that a tipping point for the ‘green’ movement in investing had finally occurred.

According to data from Trackinsight, assets under management held within U.S. listed ESG ETFs grew from $82.8 billion to $144.2 billion in 2021. In response to this growing demand, asset managers were also eager to bring new products to market. During the calendar year 2021, 80 new ESG funds came to market, more than doubling the number of ESG launches in the prior year. And of the 229 ETFs that were available in 2021, 220 (96%) had gathered positive flows during the year.

However, investors focus in 2022 seems to have shifted, with outflows across a larger proportion of ESG ETFs. With 254 ESG ETFs now available in the marketplace at the end of May, only 179 (70%) have gathered assets so far this year. In total, these ETFs now hold $126.6 billion in assets under management.

Clean energy investments change course

ETFs related to clean energy or carbon transition, many of which had been top asset gatherers in 2021, are now seeing net outflows year-to-date.

As traditional energy stocks have been one of the few areas of the market that have delivered positive returns so far this year, with the Energy Select Sector SPDR Fund ETF (XLE) gaining 58.6% through the end of May, it follows that most clean energy thematic ESG funds are underperforming broad equity market indices for the year.

Of the 29 funds found within the Clean Energy or Carbon Transition subcategories, 15 are underperforming the S&P 500 and the MSCI World Index for the year.

Core ESG funds remain popular

Some of the largest ESG ETFs, such as the iShares ESG Aware MSCI USA ETF (ESGU), are designed to be used as core allocations within a portfolio. These funds have been popular with investors and are seeing continued inflows this year.

Despite their designation as ESG ETFs, these funds do not tend to look that different from the segments of the market they are designed to offer exposure to, screening out the worst offenders while maintaining sector allocations that are in line with traditional benchmarks and minimizing tracking error.

Though some argue that these funds are guilty of “greenwashing,” they remain popular with investors who want to add ESG ETFs to their portfolio without taking on the risk of significant performance deviation from broad market benchmarks.

Looking ahead

Though interest in ESG from investors has cooled slightly, these ETFs have still seen net inflows of $4.5 billion through the end of May. In addition, asset managers continue to bring more products to market, evolving the space. There have been 25 new ESG ETFs that have launched so far this year, with climate change and carbon transition remaining a popular theme. Telling a similar story to investor flows, it seems that asset managers are betting on a continued shift towards clean energy, perhaps spurred by not only consumer interest but government regulation as well.