Challenging year so far for sustainable funds: Morningstar

Investors in sustainable funds are prioritising climate action, according to Morningstar’s latest report.

It’s been a challenging year for sustainable funds, with only 33 per cent outperforming their peers within their respective categories.

Despite this, Morningstar’s Sustainable Investing Landscape for Australian Investors report reveals that the long-term trajectory for these funds is more positive. Of sustainable investments with five-year track records, 52 per cent outperformed their peers in their respective Morningstar categories, the report states.

The report, released at the end of last month, reveals that difficult market conditions — including inflationary pressures, rising interest rates, and market volatility — have continued to impact flows into sustainable assets to the third quarter of this year.

However, sustainable investments have proved to be resilient over the past ten quarters, which takes in the initial market shock of the COVID-19 pandemic.

There was an increase in the total assets invested sustainably compared to the third quarter of 2021, of around 1.5 per cent. Assets invested in Australasia-domiciled sustainable investments have increased 56 per cent since 30 September 2020.

“Whilst sustainable investments did experience some outflows, the magnitude of the outflows were significantly smaller than the broader market. To put it into context, sustainable outflows only contributed 7.5 per cent to total outflows in the first quarter of 2020,” the report states, adding that flows into sustainable investments appear to be more stable than broader investments in times of market stress.

Other key findings

According to the report, Australia has a concentrated sustainable funds market with the top 10 funds holding 69 per cent of the total assets in the sustainable fund universe. The universe is led by asset managers Australian Ethical with 15 per cent of funds, and Vanguard at 12 per cent.

Of the 141 Australasian-domicIled sustainable investments that exclude investment in controversial areas, 132 excluded tobacco and 129 excluded controversial weapons.

Six new funds launched in the second quarter of 2022, bringing the year to date total to 15. The report notes that Australia’s sustainable funds market is still relatively small compared to the US and Europe, but the report notes that “the sustainable funds universe does not contain the growing number of Australasian funds that now formally consider ESG factors in their security selection”.

Active strategies in sustainable investment appeared to be more popular this quarter than passive investments; there was an increase in net flows invested into active strategies compared to the second quarter. Of the six new funds launched last quarter, half were active and half were index.

And investors putting their money into sustainability are looking for decarbonisation and the transition to net zero, the report notes. Sustainable Development Goal 13, focused on climate action, was the most common prioritised sustainable development goal by revenue across Australasia.