While anyone with a passing investing interest would acknowledge ESG investing is growing in popularity, a few statistics on 2020 fund flows show how far — and how fast — the trend is moving.
Consider the following five stats, which come courtesy of Morningstar1:
- S. flows into sustainable open-end funds and ETFs totaled $51.1 billion, more than double the flows of 2019 and almost 10 times as much as 2018.
- Much of that growth came in the fourth quarter, when flows totaled $20.5 billion. That doubled the previous record for any given quarter.
- Fund flows have now averaged $12 billion for each of the past five quarters. For perspective, flows averaged $3.1 billion in the five quarters before that.
- In 2020 sustainable fund flows represented nearly a quarter (24%) of all flows into U.S. stock and bond funds.
- At the end of 2020, there were 369 sustainable funds, Morningstar reported.
It is that last statistic that we believe has meaning for advisors and consultants. As investor interest in ESG has grown, so too have the number of strategies catering to sustainable investing.
Advisors will have their work cut out for them in getting clients to articulate what they want and expect from an ESG strategy, and matching those intentions with the right strategy. This summer, we put out a paper aimed at helping advisors in those efforts.
The paper covers the topic in more detail, but we identified seven questions that can potentially help advisors at the beginning of their due diligence process. Those include:
- How long is your history in the ESG space?
- Does your firm simply exclude non-ESG friendly companies, or do you have a dedicated process for selecting and evaluating companies on ESG criteria?
- Does your firm have a dedicated ESG analyst?
- Do you rely on external ESG ratings for investing, or do you do your own research?
- What are your structural risk controls to ensure the strategy does not stray too far from its benchmark?
- How often have you voted proxies independent of management?
- Can you share a story that highlights your team’s corporate engagement?
These questions alone won’t guide an advisor through their search but may provide an early reference point in identifying how dedicated an asset manager is to the space. For more information on due diligence and matching client expectations, you can access the full paper by clicking the graphic below, ESG Due Diligence: What to Ask.
1 https://www.morningstar.com/articles/1019195/a-broken-record-flows-for-us-sustainable-funds-again-reach-new-heights