ESG funds were major beneficiaries of Australians’ cash in 2021, according to the last Global Fund Flow Index from Calastone, the largest global funds network. The net new capital invested in ESG equity funds more than quadrupled year-on-year (+338%) to A$3.0bn. As recently as 2019, ESG funds in Australia were still seeing capital drain out.
Nevertheless, ESG strategies are still markedly less popular among Australian investors than among their peers abroad. In the UK, for example, flows first turned positive two years earlier, 2018. Moreover, in the UK, $8 in every $10 of the net new money flowing into equity funds of all types last year opted for ESG strategies, compared to $2 in every $10 in Australia. Other Europeans even withdrew money from traditional (i.e. non-ESG) funds in 2021,but doubled their subscription to ESG offerings.
Figure 1: Investment in ESG equity funds boomed 2021, particularly in Q3 and Q4
Traditional (non ESG) active funds maintain foothold in Australia ….for now
The ESG gold rush is proving a boon for the active fund management industry around the world, though traditional (i.e. non ESG) active funds have maintained a stronger foothold in Australia than elsewhere. In 2021, traditional active funds still accounted for A$7.50 in every A$10 of new money flowing into all kinds of active equity funds last year, with active ESG equity funds accounting for the remaining $2.50. In the UK, traditional active equity funds garnered just A$1 in every A$10 of new money flowing into active funds in 2021, with the other $9 heading for ESG versions.
Passive ESG funds are beginning to compete more successfully for investor attention in some other markets like the UK, but they have yet to make a real impact. ESG standards are still evolving so passive strategies will struggle to establish for the time being. Almost all the ESG equity cash invested by Australians (98%) went into actively managed funds in 2021.
Figure 2: Will Australia (left) follow global trend (right), where active ESG equity funds have taken market share from traditional active equity funds?
ESG investing is beginning to become a meaningful driver of fixed income funds too. In Australia, $4 in every $10 of inflows to fixed income funds last year were devoted to ESG strategies. In this respect, Australian investors are ahead of those elsewhere. In the UK, for example, one quarter of net flows to bond funds were ESG-driven last year.
Teresa Walker, Managing Director, Head of Australia and New Zealand at Calastone, said: “Inflows to ESG funds have grown exponentially, following trends we are seeing elsewhere in the world and we expect this to continue in 2022 as economies reopen. In some markets, ESG equity funds are taking new capital market share from traditionally managed funds, a trend that may begin to feature in Australia’s fund market. Nevertheless, the value of ESG funds under management is still dwarfed by traditional categories, so there is a lot of headroom to grow further, which is good news for active fund managers.
ESG funds also tend to invest globally, so the ESG boom in Australia is likely to boost the international diversification of Australians’ savings which have typically favoured domestic investments. In 2021, for example, three fifths of ESG cash flowed into global ESG funds, compared to less than half the cash devoted to non-ESG equity funds.”
Calastone analysed over half a million buy and sell orders every month from January 2019, tracking capital from advisers, platforms and as it flows into and out of managed funds. Data is collected until the close of business on the last day of each month. A single order is usually the aggregated value of a number of trades from underlying investors passed for example from a platform via Calastone to the fund manager. In reality therefore, the index is analysing the impact of many millions of investor decisions each month.
More than 95% of Australian managed fund flows pass across the Calastone network each month. All these trades are included in the FFI. To avoid double-counting, however, the team has excluded deals that represent transactions where funds of funds are buying those funds that comprise the portfolio.
The index is a measure of investor conviction, placing the net flow of capital into the context of overall trading volumes. It also allows the reader to compare flows in asset classes of different sizes – A$100m of inflows may be very large for a small, relatively new asset class like ESG equity but very small for a huge category like fixed income. A reading of 50 indicates that new money investors put into funds equals the value of redemptions (or sales) from funds. A reading of 100 would mean all activity was buying; a reading of 0 would mean all activity was selling. In other words, $1m of net inflows will score more highly if there is no selling activity, than it would if $1m was merely a small difference between a large amount of buying and a similarly large amount of selling.
Calastone’s FFI considers transactions only by Australia-based investors, placing orders for funds domiciled in Australia. The majority of this capital is advised, via platforms.