Sustainable funds return to outperformance in reversal of 2022, says report
Sustainable funds beat traditional funds in the first half of 2023, helped in particular by a rebound in growth stocks, according to research from Morgan Stanley.
In a report, the bank’s Institute for Sustainable Investing said the median return for sustainable funds in the first half of this year was 6.9% and traditional funds’ 3.8%.
Structural market factors were more favourable to sustainable funds’ positioning in the first half of 2023, according to the report. In 2022, a rapid rise in interest rates structurally benefitted value styles of investing, but the more stable market conditions of H1 2023 favoured sustainable funds’ more growth-oriented, long-term positioning, it said.
Longer duration in fixed income also helped contribute to sustainable funds’ outperformance, Morgan Stanley said.
“Our mid-year update shows the resilience of ESG funds with a return to outperformance after a challenging 2022,” said Jessica Alsford, Morgan Stanley’s chief sustainability officer and chief executive officer of the Institute.
By asset class, sustainable equity funds posted the strongest gains, showing a 10.9% median return and outperforming traditional equity funds’ 8%. Fixed income outperformance was more muted, with sustainable funds at a 3.8% median return conpared with the traditional funds’ 2.2%.
Sustainable funds’ assets under management continued to grow despite last year’s underperformance, with net positive first-half inflows of $57bn (€52.5bn) coming in at just over 2% of 2022 year-end AUM. As a proportion of total AUM, sustainable funds’ AUM reached record levels of 7.9% by the end of June.
Inflows were modest, at 0.5% and 1.6% of 2022 year-end AUM, respectively, and slightly lower than overall sustainable fund inflows.
Morgan Stanley’s report also included data on restriction screening, noting that its use had significantly increased by 2021 as the SFDR came into effect. Nearly 90% of both Article 8 and Article 9 funds screen for at least one issue and over 60% of European AUM is covered by some sort of screen.
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