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Sustainable Investing Monitor-June 1, 2024

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The Bottom Line:  Sustainable fund assets expanded due to market, social bond issuance was strong, ESG relative performance results were positive, but fund launches suffered.

Long-Term Net Assets:  Sustainable Mutual Funds and ETFs 

Focused sustainable long-term fund assets under management attributable to mutual funds and ETFs (excluding money market funds), 1,475 funds/share classes in total, based on Morningstar classifications, closed the month of May at $339.1 billion in net assets. This represents an increase of $10.1 billion, or a net gain of 3%, which doesn’t completely offset April’s $13.9 billion decline but still closes the month with the second highest level of AUM so far this year.  Based on a simple calculation that reflects the average May total return gains recorded by long-term mutual funds at 3.5% and 4.9% by ETFs, it is estimated that sustainable funds experienced net cash outflows in the amount of $2.9 billion. Long-term mutual funds, which are ahead by $6.4 billion since December 31st, sustained an estimated $3.3 billion in outflows.  At the same time, the assets of the ETF segment registered a 2024 month end high level of $102.5 billion and recorded estimated inflows of $0.42 billion as of the month end.         

New Sustainable Fund Launches

The drought in sustainable fund launches continued through the end of May.  During the latest month, there were no new listings of sustainable mutual funds or ETFs.  At the same time, there was one fund closure in May (not factoring in share class closures), the small cap JP Morgan Small Cap Sustainable Leaders Fund with its eight share classes and combined total of $25.2 million in assets.  

So far this year, there have been a total of only four new fund introductions.  These consisted entirely of ETFs.  By way of comparison, 54 new funds were launched during the same period in 2023, including a combined total of 29 funds listed in May alone.  In the following seven months, 14 funds were launched, and the number of monthly listings trended lower in succession.    

The scarcity in sustainable fund launches, starting after May of last year may be attributable to the fact that anti-ESG movement in the US had gained momentum in the second quarter of 2023 and fund companies may have opted to lower their profile by curtailing focused fund offerings.  At the same time, commitments to ESG integration do not appear to have subsided, based on reporting by the largest fund companies.   

Green, Social and Sustainability Bonds Issuance 

While other reports covering sustainable debt volumes in the first quarter 2024 quote even higher volumes, the latest available data according to SIFMA show that global green, social and sustainable bond issuance in the first quarter of 2024 rose to $256.5 billion, for a Q/Q $127.9 billion increase or nearly doubling the issuance level recorded during the previous quarter. January was the strongest month, during which $123.2 billion in green, social and sustainability bonds were issued—led by green bonds over the quarter (but not in the US where sustainability bonds dominated). Issuance volumes moderated in February and March.  U.S. issuance gained too, reaching $36.5 million for a Q/Q gain of 35% and exceeding the previous 2Q 2023 quarterly high mark since early 2022.  This came on the heels of strong Q1 aggregate issuance levels for bonds in the US that saw an increase of $2.5 trillion for a 26% gain.    

One of the reasons for issuance level variations relative to SIFMA is attributable to the inclusion of sustainability-linked bonds, a segment of the sustainable debt instruments market that has been subject to regular criticism from analysts and asset managers who note that the bond targets are weak, are more likely to be missed and are hard to monitor. 

Results for April reported by Bloomberg, covering a broader universe of sustainable bonds, indicate that issuance of green, social, sustainable, sustainability-linked bonds as well as notes, reached $145.8 billion and $801.1 billion year-to-date.  Also, according to Bloomberg, bonds financing social initiatives reached an all-time monthly high in April at $14.3 billion while green bonds (green bonds and bonds issued pursuant to the Green Bond Principles) reached $90 billion.  

According to published reports, the Treasury Borrowing Advisory Committee, an industry group that works closely with the Treasury, proposed in early May the consideration of various new securities such as callable bonds, different maturities of floating-rate and inflation-linked bonds, and the green-branded securities.  The U.S. is the only major sovereign-debt issuer in developed markets that hasn’t been selling green bonds, which have swelled into a $2.6 trillion market. The U.S. Treasury advisory group estimated that 17% of green bonds were issued by sovereign governments.  In fact, the latest sovereign issuer, Qatar, raised $2.5 billion at the end of May through its first ever green bond.              

Short-Term Relative Performance:  Selected ESG Indices vs. Conventional Indices

May was a strong month for stocks as well as bond market indices, reversing April’s declines.  All three major stock benchmarks, the S&P 500 Index, Dow Jones Industrial Average and the Nasdaq Composite, reached new all-time highs and recorded, by month-end, gains of 5.0%, 2.6% and 7.0%, respectively.  Ten of the eleven S&P 500 sectors ended the month on a positive note.  The Tech sector gained 10%, Utilities added 9% while the Energy sector, due to falling oil prices, declined 0.4%.  At the same time, all mid- and small-cap sectors recorded positive results.  While well short of its high as the index continues to lag, the small cap Russell 2000 index managed to post a gain slightly above 5.0% that edged out its large cap counterpart by six basis points.  

Against this backdrop, a selection of five US and international equity ESG Leaders indices and one fixed income benchmark, constructed by MSCI around ESG screening and exclusionary criteria, recorded positive relative performance results in May as four of six ESG Leaders indices outperformed their conventional counterparts.  These include the three indices tracking international markets and one index seeking to replicate the performance of large and medium cap US stocks.  The three indices are the MSCI ACWI ex USA ESG Leaders Index, MSCI EAFE ESG Leaders Index and the MSCI Emerging Markets ESG Leaders Index, which pulled ahead of their conventional counterparts by 18 bps, 26 bps and 56 bps, respectively. Only the MSCI USA ESG Leaders Index that tracks large and mid-cap stocks missed the mark while the Bloomberg MSCI US Aggregate ESG Focus index was on par with its underlying benchmark.  That said, the reverse is true regarding 12-month results when four of five ESG indices lagged their conventional counterparts.             

Over the intermediate and long-term time frames, based on three-, five- and ten-year time periods, the results are mixed but improve over longer time periods.  Over three years, only one of six indices outperform, but this expands to three outperforming ESG indices over five years and four out of five outperforming ESG indices over the 10-year interval.  

Sources:  Morningstar Direct, Bloomberg, MSCI, SIFMA/Dealogic and Sustainable Research and Analysis LLC

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