Morningstar figures reveal drop in recently ESG rebranded funds flows

This, combined with the recent market volatility may serve as a reminder to firms that “a new name and some fancy imagery” will not be enough to sway investors, according to experts. 

In January alone, five UK domiciled funds rebranded to use words such as ‘sustainable’ in their name. Since then, there has been a steady stream of announcements from fund managers announcing ESG friendly changes and associated marketing for funds.

However, it seems investors have not been swayed by this tactic, as figures from Morningstar for Investment Week show that from February this year until May, flows in these funds have all fallen when compared to the previous four months, with the worst contender dropping 166% as its flows went from net positive to net negative.

It is important to note that in the period under discussion, February 2022 to May 2022, there has been an overall drop in UK fund flows. According to figures from the Investment Association (IA) the first quarter of 2022 saw a record quarterly outflow of £7.1bn from funds. However, this turned positive in April with £553m flowing into funds throughout the industry.

The overall drop in flows could explain some of the funds that have a slight dip in flows. For instance, Premier Miton Diversified Sustainable Growth saw its inflows fall slightly from £1.8m to £1.7m in the four months. Invesco Sustainable UK Companies meanwhile saw a slight increase in outflows from £5.5m to £5.9m during the period.

However, three other funds saw significant declines of several million, including Artemis European Sustainable, AXA Global Sustainable Distribution and Fidelity Sustainable Global Equity Income.

Victoria Hasler, head of fund research at EQ Investors, noted the funds that suffered the most are inline with the overall trends in the market, such as outflows from Emerging Markets or regional funds on the list, which are all symptomatic of investors taking risk off the table. 

For Hasler, she felt the difficult market conditions played the biggest role in outflows. However, according to other experts, the reduction in flows in the funds is likely due to a combination of market dynamics and scepticism of asset managers who have re-badged funds.

As Ryan Hughes, head of investment research at AJ Bell put it, a combination of the market rotation, the scepticism of rebrands and increasing regulation may make asset managers realise “that a new name and some fancy imagery is not enough to convince investors of a fund’s green credentials”.

Not the ‘win/win’ strategy

When asked their views on the flows of these funds, experts flagged that it showed their wariness was shared by other investors and, when combined with recent action on greenwashing, will mean that rebranding will not be the ‘win/win’ strategy asset managers had hoped for.

“I am inherently suspicious when an asset manager looks to re-badge a fund as generally it is into something that the current holders did not actually chose,” explained Hughes. “In recent times, the trend of sticking an ESG label on an existing fund and hoping investors buy it seems to have picked up some pace but this just sees my suspicions doubled.

“Asset managers are past masters of jumping on a trend but when it comes to an important issue such as sustainability, I think they may have misjudged their audience.”

Indeed, Brad Crombie, who previously worked at abrdn but is now CEO of Alquity, a responsible investment manager, noted there were “unique aspects” to how the ESG market evolved.

First, he said there was some “desperation” from big managers who did not want the ESG trend to pass them by, having already let the index market slip through their fingers. Second, because ESG is difficult to measure, investors are faced with a problem “because everyone can say that what they are doing is ESG”.

He argued that all this means, as the market matures over the next five years, the industry will look back on “so called ESG products” and “conclude that at some level, a large majority, will be regarded as greenwashing”.

Some of this is already starting to filter through, as regulators such as the SEC and the FCA look to crack down on what has been seen as the ‘Wild West’ of ESG labelled funds.

Recently under the spotlight are companies including BNY Mellon, DWS and Goldman Sachs, with DWS chief executive Asoka Woehrmann resigning following a police raid on the firm.

“The regulators are coming for funds claiming to be ESG,” said Patrick Wood Uribe, CEO of sustainable data provider Util. “The SEC’s proposed changes to its Name Rule, in particular, will mean tougher standards for funds purporting to invest sustainably, which has been borne out by recent regulatory action against a swathe of asset managers.”

He added that “rebranding funds will not continue to be the ‘win/win’ scenario of the regulatory Wild West that characterised the last three years in ESG.”

The other side of the coin

However, not all commentators agreed and Steve Kenny, chief distribution officer at Square Mile Investment Consulting and Research, said the argument for repurposing funds stands and is worth the effort.

He noted there is a difference in Europe compared to the UK, given major fund buyers are looking to include only Article 8 or 9 funds on their lists. However, in the UK there is no explicit requirement or labelling yet and distribution is different as in Europe it is dominated by banks.

Nevertheless, he added that “repurposing existing strategies to include sustainability is a strategic decision, taking account of this major change in investment preference and what is expected to be the direction of travel for fund flows, not a tactical one”.

“In my view, groups are planning for this and want to ensure they have a fund suite that is fit for purpose for the future. I do not expect, therefore, to see the rate of repurposing to change.”