Australia's sustainable funds market is growing at a blistering pace

This is a snippet from Morningstar's quarterly Sustainable Investing Landscape for Australian Fund Investors, Q2 2020. Morningstar Premium subscribers can view the report here. 

Retail assets invested in sustainable funds topped a record $33.4 billion at the end of fiscal-2021. The rate of growth continues at a blistering pace, notching up the highest quarterly flows on record as $2.9 billion flowed into the sector. 

Here we highlight some recent trends in the Australian retail sustainable investing market. 

Record assets

At the end of the second quarter of 2021, Morningstar estimates that retail assets invested in Australasian sustainable investments were $33.420 billion, an 18% increase compared with 31 March 2021 and a 66% increase compared with 30 June 2020.

Staying active

Estimated second-quarter flows of $2.948 billion was the highest on record, topping the fourth-quarter 2020 flows of $1.881 billion.

Inflows over the past year of $7.290 billion have been split predominantly towards active ($4.791 billion or 66%) rather than passive ($2.498 billion or 34%) strategies.

Allocation funds slightly topped equity strategies over the quarter, gathering $1,242 million behind strong showings from Pendal Sustainable Balanced, Pendal Sustainable Conservative, and Australian Ethical Balanced. Equity funds followed closely behind, accumulating $1,169 million, well ahead of the $287 million gathered by fixed-income strategies.

Five fund houses dominated fund flows, with Pendal and Vanguard atop the group; Australian Ethical, BetaShares, and Dimensional accounted for the remainder of most inflows for the quarter.

Market concentration

The Australian sustainable funds market remains quite concentrated, with the top 20 funds accounting for 58% of total assets in the sustainable fund universe.

Australian Ethical and Vanguard remain the dominant Australasian providers of sustainable funds, each with a market share around 20%.

Outperformance

Over the trailing year ended 30 June 2021, 51% (52 of 102) of sustainable investments outperformed their peers within their respective categories. Performance was largely balanced across the largest broad category, equity, but was more skewed towards sustainable outperformance within allocation funds, which were a beneficiary of strong inflows in the second quarter of 2021.

New launches

Three funds were launched in the second quarter, following no launches in 2021's first quarter. This puts 2021 at a slower pace than previous years, where a rush of funds, including a growing number of passive funds, came to market.

Despite the slow pace thus far in 2021, the momentum of sustainable fund launches has lifted significantly since 2015, and 2020 was the fifth consecutive year of double-digit fund launches. Additionally, recent fund launches have featured more passive strategies. Of the passive launches, offerings from global titan Vanguard and local up-and-comer BetaShares have gathered considerable assets. As at 30 June 2021, five of the top 10 largest sustainable strategies by assets were passive products offered by the two firms, backed by strong inflows over the trailing five years.

Elsewhere, the Regnan, an affiliate of Pendal Group, has raised nearly $220 million in two impact strategies, Regnan Credit Impact Trust and Regnan Global Equity Impact Solutions, since their 2020 launches. These launches are a positive development, given the lack of impact investment options in the Australasian market.

Excluded

As at 30 June 2021, Australasian retail investors have access to 135 Australasia-domiciled sustainable funds. One hundred and two of these Australasia-domiciled funds employ some form of exclusion from investment in controversial areas, with a high number of funds excluding tobacco (100) and controversial weapons (95) companies that derive a significant portion of revenue from nuclear weapons, land mines and cluster munitions.

Greenwashing

ASIC announced a greenwashing review in July 2021 in an effort to ensure financial products and investment strategies adhere to their green or ESG claims. This review was prompted in part by the increasing demand for ESG strategies, particularly from younger investors.

This review follows ASIC's recent review of climate risk disclosures by large listed companies and also follows recently adopted legal frameworks in the European Union and reviews on ESG disclosures from the US Securities and Exchange Commission.