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Sustainable investing is losing some of its cool-kid status.
In the early months of the pandemic, investment products with green hues flourished, and it appeared investors couldn’t get enough. But, it turns out, many could.
New data show the appetite has waned, even though the environmental and societal problems many are supposed to address are only becoming more acute.
A big reason is fear – not of the climate crisis, but of economic and market meltdown with runaway inflation and recession looming large. This has been a drag on the entire fund industry, which has been hit with redemptions. But other factors specific to investing through an environmental, social and governance (ESG) lens could also be making investors and fund managers skittish.
In the second quarter of this year, money flows into Canadian sustainable mutual and exchange-traded funds totaled $1.92-billion, down about 13 per cent from the previous quarter, according to Morningstar. The drop was far less severe than in the sustainable investing scene globally, where flows into such funds fell 62 per cent from the previous quarter to US$32.6-billion.
Total assets in Canadian sustainable funds and ETFs fell 4.5 per cent from the first quarter to $31.5-billion at the end of June.
Meanwhile, fund managers launched 14 sustainable funds during the April-to-June period, half the number of the previous quarter. A year earlier, the industry launched 31 new funds in the second quarter.
Drops in dollars flowing into funds and in the number of launches are more evidence of the crosswinds battering the world of ESG investing following a lengthy period of booming interest. Many investors, scared by shrinking value among long-term-growth-focused funds and companies, have taken refuge in opportunities elsewhere that offer short-term safety, said Abdulai Mohamed, manager research analyst at Morningstar.
“People are becoming a lot more fearful these days, even though, when you think about it, when you invest in sustainable funds and impact funds you should not be tuned too much to the short-term noise in the market. You should continue to have that long-term objective,” Mr. Mohamed said. “But clearly we’re seeing a bit of a shift in that.”
Other factors have clouded the outlook in recent months. A big one is increasing scrutiny – regulators have begun cracking down on fund companies that promise ESG-related benefits for their investors but fail to deliver.
In the United States, the Securities and Exchange Commission has drafted a set of tougher rules for funds and advisers that are aimed at stamping out the practice of making false or exaggerated environmental claims. The proposed regulations would mandate more stringent reporting of criteria for the investment strategies being employed by fund managers to prevent greenwashing. Canadian regulators have published their own guidance aimed at improving disclosure among ESG funds.
Following media reports, there’s a growing understanding among investors that not all funds that promise ESG attributes provide any benefit to the environment or society in those areas. Instead, the stocks included in them could have been rated highly as being protected against financial risks stemming from things such as government policies for climate change or social factors.
This isn’t the beginning of the end for sustainable funds, though. There is no reason to believe that demand for investments that fit with investors’ environmental and social hopes and dreams won’t rebound, especially once these issues return to the fore. Indeed, global geopolitical and economic unrest aside, another summer of heat waves, drought and wildfires is a reminder that the climate is still very much in crisis.
“They need to accept this is just a phase we’re in, and we’re going to get through it, just like we did with COVID and other recessions. Then they’ll continue with their long-term sustainable investing objectives,” Mr. Mohamed said.
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at [email protected].
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