Sustainable investing continues to gain momentum

Retail assets invested in sustainable funds hit a record $38 last quarter, an 11% increase compared with the June quarter and a 73% increase compared with this time last year according to Morningstars Australian sustainable investing fund landscape Q3 2021.

Third-quarter flows of $2.6 billion were the second highest on record, only topped by the second-quarter 2021 flows of $3.4 billion.

Inflows over the past year of $9.3 billion have gone predominantly toward active ($6 billion or 66%) rather than passive ($3 billion or 34%) strategies.

Estimated net flows of Australasian sustainable investments (AUD, Mil)

Source: Morningstar Direct. Data as of 30 Sept 2021. Excludes funds of funds.

Four fund houses dominated third-quarter flows. Vanguard's $623 million is atop a group that included BetaShares ($452 million), Dimensional ($370 million) and Australian Ethical ($236 million).

AMP Capital continued to bleed assets with net outflows of AUD 69 million over the third quarter, the fifth consecutive quarter that the AMP sustainable product range was in net outflows—a stark contrast to the broader sustainable fund sector, which is experiencing record inflows. Corporate issues at AMP and investment team departures at AMP Capital would likely explain the continuation of fund outflows.

The Australian sustainable funds market remains quite concentrated, with the top 20 funds accounting for 56% of total assets in the sustainable fund universe.

Asset managers Vanguard (21.6%) and Australian Ethical (18.4%) continued to dominate, accounting for 40% of all Australasian sustainable fund assets in the Morningstar database.

Estimated market share of top 10 managers of Australasian sustainable investment funds

Source: Morningstar Direct. Data as of 30 Sept 2021. Excludes fund of funds.

Compared with Europe and the United States, the sustainable funds market remains relatively small in Australia. No new funds were launched in the third quarter, putting 2021 at the slowest pace for fund launches since 2014.

As of 30 September 2021, Australasian retail investors had access to 144 Australasia-domiciled sustainable funds.

Australasia-domiciled sustainable fund and ETF launches

Source: Morningstar Direct. Data as of 30 Sept 2021.

Fifty-two percent of sustainable investments with five-year track records outperformed their peers within their respective Morningstar Categories. This is encouraging for investors looking to build environmental, social, and governance portfolios that align with their values, knowing that they won't sacrifice returns when compared with investments in mainstream funds.

Assets invested in Australasia-domiciled sustainable investments more than doubled in the two years since 30 September 2019.

Aggregate fund size of Australasian sustainable investments (AUD, Mil)

Source: Morningstar Direct. Data as of 30 Sept 2021. Excludes fund of funds.