Sustainable funds rebound and gain edge over traditional funds
Sustainable funds have made a comeback in the first half of 2023, surpassing traditional funds and driven primarily by a resurgence in growth stocks, according to a report by Morgan Stanley.
The bank's Institute for Sustainable Investing revealed that sustainable funds achieved a median return of 6.9% in the first half of the year, outperforming traditional funds' 3.8%.
The report attributed the shift to more favorable structural market conditions for sustainable funds in the first half of 2023. While the previous year had seen a rise in interest rates that favored value-focused investment styles, the steadier market conditions of H1 2023 aligned with sustainable funds' growth-oriented, long-term approach.
Morgan Stanley pointed out that extended maturity in fixed-income investments also contributed to the superior performance of sustainable funds.
“Our mid-year update shows the resilience of ESG funds with a return to outperformance after a challenging 2022,” said Jessica Alsford, chief sustainability officer and chief executive officer of the Institute, as quoted in Investment & Pensions Europe.
Sustainable equity funds stood out in terms of asset class performance, achieving a median return of 10.9%, surpassing the 8% return of traditional equity funds.
Fixed income performance differences were less pronounced, with sustainable funds delivering a 3.8% median return compared to the 2.2% return of traditional funds.
Despite a period of underperformance in the prior year, sustainable funds experienced continued growth in assets under management (AUM). The first half of 2023 saw net inflows of $57 billion, equivalent to just over 2% of AUM at the end of 2022. By June, sustainable funds accounted for 7.9% of total AUM.
The report also reviewed the performance and demand for Article 8 and 9 funds under the European Union's Sustainable Finance Disclosures Regulation (SFDR) during the first half of 2023. It found that these funds slightly underperformed Morningstar's narrower definition of 'Sustainable' funds, but outperformed European traditional funds.
In terms of inflows, Article 8 and 9 funds received modest investments, representing 0.5% and 1.6% of 2022 year-end AUM, respectively. These figures were slightly below the overall inflow trends observed for sustainable funds.
The report also delved into restriction screening, noting an increase in its usage following the implementation of SFDR in 2021. Approximately 90% of both Article 8 and Article 9 funds employ some form of screening for specific issues. Moreover, over 60% of European AUM are influenced by such screening mechanisms.
