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Sustainable funds challenged by recent headwinds

 — 1 minute read

Sectors favoured by ESG strategies have performed poorly in recent months.

While long-term outperformance has persisted across a majority of sustainable investments, less than a third of sustainable funds outperformed their peers during the past six months.

Analysis conducted by Morningstar revealed that 31 per cent of sustainable funds in Australia outperformed their peers within their respective categories in the first half of this year.

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“Sectors that ESG strategies have traditionally favoured, such as healthcare and information technology, have performed poorly in recent times after producing positive returns for several years,” said Morningstar ESG analyst Erica Hall.

So far in 2022, the S&P/ASX 200 Healthcare Index has returned -5.32 per cent and the S&P/ASX 200 Information Technology Index has returned -32.87 per cent.

Meanwhile, the energy sector, which Morningstar noted is typically underweighted or not held at all by sustainable funds, has performed strongly on the back of rallying oil and gas prices with a 23.6 per cent year-to-date gain for the S&P/ASX 200 Energy Index.

“The recent market conditions have been difficult for sustainable investors,” said Ms Hall.

However, of the 83 sustainable investments with a five-year track record, 55 per cent were found to have outperformed their peers within their respective categories over that timeframe.

“This is encouraging for investors looking to build environmental, social, and governance portfolios that align with their values, knowing that they will not sacrifice long-term returns when compared with investments in mainstream funds,” Ms Hall suggested.

According to Morningstar, assets invested in Australasian-domiciled sustainable funds totalled $38.749 billion at the end of the second quarter, 5.97 per cent lower than the previous quarter.

Despite the recent falls, the total value of assets invested sustainable is up 13.53 per cent versus the second half of 2021 and has nearly doubled over the past two years.

Net flows remained positive during the second quarter, but were estimated by Morningstar to have fallen by 29.3 per cent to $845 million.

“While flows were weaker, sustainable funds' inflows have held up far better than their conventional peers, which experienced a significant outflow of -$9.470 billion, which was -467 per cent compared with the previous quarter,” Ms Hall noted.

“So substantial was the decline that it well surpassed the outflows that occurred at the start of the pandemic in the first quarter of 2020 by -$5.592 billion.”

Based on total funds under management, active sustainable investing strategies have continued to dominate over passive with a share of 72 per cent. 

But Morningstar reported that over 84 per cent of total inflows during the second quarter were allocated towards passive sustainable funds.

Sustainable funds challenged by recent headwinds

Sectors favoured by ESG strategies have performed poorly in recent months.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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