New data from Calastone has revealed flows into ESG funds in Australia rose by 338 per cent to $2.96 billion in 2021, with strong inflows during the latter half of the year.
The third quarter accounted for more than half of all inflows in 2021, at a total of $1.57 billion with an additional $939 million in the fourth quarter, while the full-year inflows were a significant improvement on the $188 million in outflows recorded in 2019.
“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,” said Calastone managing director, head of Australia and New Zealand, Teresa Walker.
Despite the strong growth, Australia still lags other markets globally on ESG inflows including the UK, where $8 out of every $10 of net new money into equity funds is directed towards those with ESG strategies compared to only $2 in every $10 locally.
Calastone noted that, during 2021, investors in Europe had actually taken money out of traditional funds while doubling their subscription to ESG funds.
“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,” said Ms Walker.
“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.”
Active ESG equity funds in Australia accounted for $2.50 out of every $10 flowing into all active equity funds, significantly dwarfed by the $9 out of every $10 recorded for the UK.
Meanwhile, fixed income funds with ESG strategies received $4 out of $10 of inflows in Australia, above the levels seen in other markets globally.
Calastone noted that the ESG boom would likely lead to a boost in international diversification for Australian investors who have historically turned to 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,” Ms Walker said.
