While the global sustainable investment fund business returned to positive net flow territory in the second quarter, the Canadian industry suffered record redemptions, according to new data from Morningstar Inc.
The firm reported that sustainable funds in Canada saw their highest quarterly net outflow of US$1.4 billion (all figures are in U.S. dollars) in the second quarter, but most of that total came from a single fund.
“Active strategies bled about US$200 million, while passive strategies’ withdrawals reached
US$1.4 billion due to one ETF, namely BMO MSCI USA ESG Leaders Index ETF, which alone registered redemptions of US$1.3 billion,” Morningstar reported.
The hefty outflow was partly offset by $331 million in positive net flows into a newly launched fund, the Desjardins Sustainable Canadian Corporate Bond Fund; $129 million flowing into the Aviva Investors Canadian Core Plus Climate Transition Pooled Fund; and $121 million into the BMO MSCI India ESG Leaders Index ETF, Morningstar said.
The negative net flow activity overall also impacted sustainable fund assets, which resulted in assets under management slipping to almost $36 billion in the second quarter.
“Whilst [active] strategies were hit by a marginal decline in assets, assets of passive sustainable funds slid by almost 14%,” it said.
Despite the decline in assets and the negative net flows, seven new sustainable funds launched last quarter, which marked an uptick from the previous quarter, Morningstar noted.
Alongside the new Desjardins corporate bond fund, National Bank Investments launched a series of allocation funds that “use proprietary tools to assess the sustainability impact of potential investments, ensuring that each portfolio supports long-term growth while contributing positively to societal and environmental outcomes,” it said.
Five ETFs from TD Asset Management were closed during the quarter, along with a sixth fund, the report said.
The downside activity in the Canadian market ran counter to the global universe of sustainable funds and ETFs, which generated an estimated $4.3 billion of net new money, up from $2.9 billion in outflows in the first quarter.
Europe led the way, with sustainable funds recording $11.8-billion worth of net inflows, up from $8.4 billion in the first quarter.
While U.S. investors continued to shun sustainable funds in the second quarter, quarterly net redemptions dropped almost in half — from $9 billion in the first quarter to $4.7 billion in the second quarter.
Redemption activity in Japan eased a bit too, slipping from $1.7 billion in the first quarter to $1.3 billion in Q2, the report said.
For the rest of Asia (excluding Japan), net flows swung from negative ($700 million) in Q1 to positive ($700 million) in Q2.
“Calculated as net flows relative to total assets at the start of a period, the organic growth rate of the global sustainable fund universe was 0.14% in the second quarter, a slight improvement on the 0.01% rate in the previous quarter,” the report said. “Yet, the aggregate growth of sustainable funds lagged that of the broader funds universe, which with US$200 billion of inflows, recorded an organic growth rate of 0.4%.”
Bolstered by market gains, global sustainable fund assets remained steady at $3.1 trillion by the end of the second quarter, Morningstar said.
“The picture for global ESG fund flows is starting to improve,” said Hortense Bioy, head of sustainable investing research with Morningstar Sustainalytics, in a release. “We started the year with outflows, but this has since turned around, with money trickling back into the sector.”
“European ESG funds have gathered more than $20 billion so far this year,” Bioy said. “In the U.S., investor appetite for ESG funds remains subdued, with continued outflows, but these were smaller than what we saw in the previous two quarters.”
Globally, product development activity has slowed this year too.
Through the first six months of the year, approximately 170 new sustainable funds were launched, down from 325 for the same period last year.
“The cooldown reflects a normalization of the sustainable product development activity after three years of high growth, during which almost every asset management firm hastened to build their core sustainable fund ranges to meet the growing demand,” the report said.
“Managers are now more selective and tactical in their approach to product launches,” it said. “Many are also waiting for the finalization and implementation of European regulations, such as the U.K.’s Sustainability Disclosure Requirements and the EU’s [Sustainable Finance Disclosure Regulation], as these will determine the requirements for new sustainable strategies.”