This summer, it seems ESG has become a buzzword for punditry. Some pundits believe that sustainable investing is just virtue signaling and doesn’t represent a viable investment thesis. But ESG integration has nothing to do with personal values or politics and everything to do with considering the material risks that come from environmental, social, and governance factors when valuating companies.1
Headlines that focus on sustainable funds experiencing “outflows” imply that investors have lost confidence in sustainable investing.
Investors, however, not only increasingly understand the purpose of sustainable investing, the data shows that they maintained their confidence in sustainable investment products throughout the market volatility and increased regulatory scrutiny of the past six months.
Despite being a challenging year for both stocks and bonds, sustainable funds fared better in Q2 than the broad US market, according to Morningstar. Sustainable funds grew by 2.5 percent, compared to funds overall which shrunk by 0.4 percent.2 At Envestnet, we’ve witnessed a similar trend on our platform with advisor and account interest in sustainable products on the rise. The second quarter of 2022 saw significant outflows from investment strategies across asset class, product type, and theme. Admittedly, sustainable assets on the Envestnet platform peaked at $45B at the end of 2021 and finished June just shy of $38B.
| Asset Class | Sustainable % Total | Traditional % Total |
|---|---|---|
| Alternative | 0.13% | 1.84% |
| Asset Allocated | 5.38% | 10.81% |
| Cash | 0.00% | 6.76% |
| Equity | 80.20% | 50.50% |
| Fixed Income | 11.46% | 20.59% |
| Other | 2.83% | 9.49% |
| Grand Total | 100% | 100% |
It is important to note that an overwhelming majority of sustainable investment solutions today are invested in the public equity markets. At Envestnet, over 80 percent of our sustainable assets are equity focused. Compare this to non-sustainable investments, where that exposure is only 50 percent. With the equity markets in turmoil, it makes sense that the percentage decrease in assets would be much more dramatic for sustainable [equity] solutions than the [more diversified] traditional investment products. Looking exclusively at assets, then, won’t tell you anything about investors’ interest in sustainable investing.
Instead, we look to the trends across advisors and accounts investing in sustainable products, and the types of sustainable solutions they are turning to.
Advisors are increasingly interested in sustainable products
The number of advisors using sustainable investments on Envestnet’s platform, over 44,500, is up more than five percent over the past 12 months. These advisors now account for more than one third of Envestnet’s total advisor base.
More accounts are investing in sustainable products than ever before
To top it off, more advisors have begun investing in sustainable funds across more of their client accounts. As a result, the number of accounts invested in sustainable products, over 875,000, is up more than 10 percent over the past 12 months.
Advisors are seeking out sustainable expertise
Over the past three years we’ve witnessed a significant change in the way advisors engage in sustainable investing, specifically the shifting of assets from traditional rep-as-PM programs to experienced third-party managed account programs. Over the past six months (YTD), AUM programs represented almost 75 percent of all sustainable net flows. Compare this to 12-month flows, where that number was only 52 percent.
The trend towards AUM is picking up speed as advisors and investors recognize the importance of sustainable expertise. In fact, net flows to third-party managed sustainable products remained positive for Q2 with almost $200M in net new allocations. Year-to-date net flows are up over $1B.
At Envestnet, there has not been a mass exodus away from sustainable investing but rather the opposite, as advisors and investors increasingly understand and embrace sustainable investing as a viable investment thesis to preserve long-term value in their portfolios. To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable/.
Sources:
1. Kiley Miller, “Stop Conveniently Oversimplifying ESG,” Financial Advisor Magazine, July 8, 2022, https://www.fa-mag.com/news/esg-tokenism-and-the–woke-capitalism–debate-68684.html?section=68
2. Alyssa Stankiewicz, “U.S. Sustainable Funds See Outflows for the First Time in Five Years,” Morningstar.com, July 27, 2022, https://www.morningstar.com/articles/1104758/us-sustainable-funds-see-outflows-for-the-first-time-in-five-years
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WRITTEN BY
Carlee Griffeth
Carlee Griffeth is an ESG Data and Research Analyst for Envestnet | PMC’s Sustainable Investing Team. Her work is focused on ESG and thematic impact due diligence. She is also responsible for sourcing and analyzing ESG data to support the development of sustainable products and reporting tools for advisors. Prior to Envestnet, Carlee served in the federal government for eight years, including the White House and both chambers of Congress. She earned her Master’s Degree in Urban Planning at Harvard University, where she focused her studies on sustainable development and decarbonized infrastructure.