NEW YORK (May 18, 2023) – ISS Market Intelligence (ISS MI), a unit of Institutional Shareholder Services and a leading global provider of data, analytics, insights, media, and events solutions to the global financial services industry, today announced the release of its State of the ESG Fund Market report providing analysis and outlook for ESG funds in the U.S. market.
According to the report, net flows for U.S. ESG funds, at $3 billion, finished 2022 in positive territory with ESG funds seeing organic growth, which measures flows as a percentage of assets, tick up 0.8 percent as long-term fund flows shrunk at a 1.4 percent pace. At year end, long-term ESG fund assets under management (AUM) clocked in at $319 billion, accounting for 1.5 percent of all long-term AUM.
The report finds that, amid turbulent markets, spiking energy prices, and political backlash, demand for ESG products slowed in 2022. Fund providers, however, continued to launch new ESG products at a relatively healthy pace indicating asset managers expect demand for ESG-themed investments to remain strong. New fund launches slowed across most product types in 2022, including ESG ones, but 89 new ESG strategies went live—short of the record 133 launches in 2021, but well ahead of 2019 and 2020 levels.
ESG index funds outsold active ESG funds by more than a 2-to-1 margin from 2020 to 2022, the report finds, but active strategies accounted for an increasing share of new product; 75 percent of ESG funds debuting in 2022 were actively managed, and almost half of these were active ETFs. A near-majority of new funds specialized in specific ESG themes, especially relating to climate change and the transition to low-carbon energy sources. The iShares Paris-Aligned Climate MSCI USA ETF, which harnessed institutional demand to raise nearly $1 billion, was the year’s most successful ESG product launch in the United States in terms of amounts raised.
“While 2022 revealed ESG products as hardly immune to broader pressures, their resilience amid challenging conditions should quell concerns that buyers would bail at the first sign of trouble,” said Christopher Davis, lead author of the report and Head of U.S. Fund Research at ISS MI. “Such stability is a welcome sign that ESG funds’ recent market share gains were not merely a short-term phenomenon.”
The number of funds adding prospectus language indicating that they use ESG factors as part of their investment strategies reached record levels last year, as did the volume as measured in terms of AUM. In all, ISS MI’s analysis finds that funds representing more than $1.9 trillion in assets incorporated ESG elements into their investment process this past year. The lion’s share came in the first quarter when behemoth manager American Funds disclosed it would include ESG factors as part of the investment process firmwide—making it the largest fund manager in the United States to do so.
ESG fund sales appear to have been as resilient in the intermediary market as they have been more broadly, the report suggests. Members of the ISS MI Simfund Distribution consortium, which report sales activity across intermediary channels, suffered smaller declines in AUM for ESG-funds compared with non-ESG funds across distribution channels in 2022; ESG assets for consortium members fell 17 percent over the period, versus a 23 percent decline for non-ESG funds.
Simfund Enterprise subscribers have direct platform access to State of the ESG Fund Market, or contact sales@issmarketintelligence.com to learn more.
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Founded in 1985, Institutional Shareholder Services group of companies (ISS) empowers investors and companies to build for long-term and sustainable growth by providing high-quality data, analytics and insight. ISS, which is majority owned by Deutsche Bourse Group, along with Genstar Capital and ISS management, is a leading provider of corporate governance and responsible investment solutions, market intelligence, fund services, and events and editorial content for institutional investors and corporations, globally. ISS operates on an arm’s-length basis and Deutsche Bourse has adopted Principles protecting the independence and integrity of ISS’ research offerings. ISS’ 2,000 employees operate worldwide across more than 30 global offices in 15 countries. Its more than 4,000 clients include many of the world’s leading institutional investors who rely on ISS’ objective and impartial ESG and governance research, market intelligence and fund services and data and analytics, as well as public companies focused on ESG and governance risk mitigation as a shareholder value enhancing measure. Clients rely on ISS’ expertise to help them make informed investment decisions.
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