2022 has been a challenging year so far for sustainable funds in Australia and New Zealand, according to a new analysis released by Morningstar.
During the past 12 months, only 33 per cent of the 193 sustainable funds identified by Morningstar have outperformed their peers within their respective categories.
The firm noted that negative returns for the S&P/ASX 300 (-11.95 per cent) and the MSCI ACWI ex Australia Index (AUD) (-10.53 per cent) over the same period provided some context for the weaker performance seen across the sustainable investing landscape.
“Further sectors that environmental, social, and governance strategies have traditionally eschewed — such as energy — have done well, while those they have favoured — like information technology — have performed poorly,” added Morningstar ESG analyst, Erica Hall.
In the 12 months to 30 September, the S&P/ASX 200 Energy Index returned 18.36 per cent, while the S&P/ASX 200 Information Technology Index returned negative 39.77 per cent.
Flows into sustainable funds remained positive during the third quarter of the year at $635 million, but were 48 per cent lower than in the previous quarter.
“Flows have been muted throughout 2022 relative to recent years. We expect [that] this is due to challenging market conditions; investors are experiencing negative performance outcomes across both growth and defensive assets,” said Ms Hall.
“This quarter saw the continuation of the issues present in the first and second quarters — inflationary pressures, rising interest rates, and market volatility.”
Dimensional received the most sustainable fund flows ($261 million) during the September quarter — ahead of BetaShares ($147 million), Vanguard ($84 million), Alphinity ($58 million) and First Sentier ($48 million). In contrast, Australian Ethical experienced a net outflow of $79.3 million.
Morningstar reported that sustainable funds have held up significantly better than the broader market, which suffered $10.05 billion of outflows during the quarter.
A total of $35.87 billion was invested in Australasia-domiciled sustainable funds at the end of the quarter, up 1.5 per cent on the June quarter and 56 per cent higher than two years ago.
Australian Ethical and Vanguard remain the two largest managers of Australasian sustainable funds with a 15 per cent and 12 per cent market share, respectively. However, Ms Hall also highlighted Dimensional as “one to watch”.
“Each quarter, Dimensional is steadily growing assets and moving up the ranks. It is now in third place for market share and topped the net sustainable flows this quarter by a significant margin. If it continues on this trajectory, it is possible it may surpass Vanguard next quarter.”
Despite the challenges of the past year, Morningstar said that 52 per cent of sustainable investments over the past five years, and 55 per cent over the past three years, have outperformed their peers within their respective categories.
