Sustainable funds continued to attract new capital during turbulent 2022.

Flows into European sustainable funds were much stronger than those into ‘conventional’ funds, despite heavy falls in the values of sustainable stocks. Flows into US sustainable funds suffered from a political fallout. Plus a London-listed sustainable investing stock to watch.

Morningstar’s Global Sustainable Fund Flows: Q4 2022 in Review is out. You can read it here. It’s a fascinating summary of the sustainable investing market following a tough and turbulent 2022.

A few points really stand out.

Europe dominates

Europe is still far and away the dominant sustainable investing market with 83% of global sustainable assets, followed by the US on 11%, and all others combined just 6%.

In Europe, flows into sustainable funds held up far better than than those into ‘conventional’ funds, even though flows into both sets of funds wobbled during 2022. Morningstar said (in their Q3 report): “sustainable fund flows demonstrated overall resilience against market volatility compared with traditional peers as sustainability-focused investors—who are typically values-driven and long-term-oriented—are slower to pull money from funds they are invested in“.

Sustainable fund assets in Europe grew to 20% of the overall fund universe. Given current trends in difficult market conditions and the amount of headroom for growth, it’s looking like the market is set to get much bigger.

US suffers from anti-ESG backlash

The US sustainable market was less resilient, and saw significant outflows in Q2 and Q4 with no obvious signs of recovery (yet?). [Note also that peak quarterly flows over the last two years in the US were much lower than those in Europe at just over US$20bn, compared to around US$150bn in Europe.]

Morningstar says: “the conversation around sustainable investing was increasingly plagued by concerns about greenwashing and an anti-ESG sentiment. In the U.S., prominent politicians have spoken out against ESG investing, and some have taken measures to limit state investment funds from doing business with asset managers based on perceptions of those managers’ ESG approaches.”

However, investors should bear in mind that the share of sustainable assets compared to the overall market in the US is tiny. While there are significant headwinds at the moment, even a modest turnaround in sentiment could be huge in terms of the size of the sustainable investing market.

London-listed stock to watch: Impax Asset Management (IPX)

Impax is a specialist sustainable investor with a 25-year track record in this market (founded in 1998). It sources assets mostly from institutional investors all over the world although it does have a retail operation in the US as well. Around 46% of revenue is generated in the EMEA region, 35% in North America, 17% in the UK and 2% in APAC. Source: Impax Analyst Presentation November 22.

Impax not only gives investors exposure to the sustainable investing market, it is looking like a winner within that market. When it comes to attracting assets, it is doing even better than the relatively strong European market. While the overall European sustainable investing market attracted assets (as a percentage of opening AUM) at a rate of 36% in 2021 and 6.6% in 2022, Impax’s net inflows were higher at 51% and 7.8%.

I cover Impax in my work as an analyst. All of my research notes can found at this link.

Disclosure: At the time of writing this blog, I was a shareholder of Impax Asset Management.

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