ESG mixed-assets (ESG MA) funds have had a tough time attracting money over the past three quarters.

This seems to be an issue specific to them rather than a spillover from either mixed assets or ESG. Despite the pronouncements of the death of ESG because of lagging performance in 2022, sustainable funds ex-money market attracted £27.6bn as their conventional peers suffered outflows of £66.9bn.

In 2021, ESG mixed-assets flows were marginally ahead of their vanilla peers—at £6bn versus £5.5bn—and in 2022 mixed-assets saw inflows of £1.6bn versus £2.6bn of outflows for their conventional peers, mainly off the back of a poor Q3 for the latter.

ESG MA quarterly flows hit a five-year peak in Q3 2019, when they attracted £3.79bn, or 84.4% of the MA whole (chart 1). While there’s been some ebbing and flowing over the five-year period, it looks like ESG MA have had an uphill struggle of late. The average quarterly inflows for ESG MA over five years are £1.25bn. ESG MA hasn’t hit that since Q2 2022, and the average for the past three quarters is just £201m. And, while conventional MA funds had a horrible Q3 2022, inflows for Q1 2023 were £3.18bn against a five-year quarterly average of £1.52bn.

Chart 1: Mixed Asset ESG v Conventional Quarterly Flows, Q2 2018 to Q1 2023 (£bn)

Source: LSEG Lipper

This is illustrated in percentage share by Chart 2, which gives a clearer insight into the relationship between ESG MA and conventional flows.

Chart 2: Mixed Asset ESG v Conventional Quarterly Flows, Q2 2018 to Q1 2023 (%)

Source: LSEG Lipper

Which begs the question as to what’s driving this. The answer is, of course, lots of things: many different forces distil into one vector, not all of which can be disentangled however hard one pours through a stack of Excel spreadsheets.

One noteworthy effect is seen from breaking down ESG flows by promoter. There are four particularly significant contributors to ESG MA flows on a quarterly basis. Two of these are more institutionally focused, and their flows tend to be ‘lumpier’ and without such obvious links to identifiable market events. Focusing on the two where flows followed a clearer, and we get Chart 3, where these two are highlighted within ESG MA flows over the period.

Chart 3: Leading Two Mixed Asset ESG Fund Promoters v The Rest Quarterly Flows, Q2 2018 to Q1 2023 (£bn)

Source: LSEG Lipper

These two promoters account for a significant proportion of quarterly flows: more than half between Q4 2019 and Q4 2021. That declined subsequently, going into redemption mode over the past three quarters. This has clearly had an impact on the overall market direction—though to emphasise, while it’s a significant factor, it’s far from the only, or even determinant, one. For example, we can see a similar trend globally, where ESG MA monthly flows peaked in November 2021 ($9.4bn), declining steeply to June 2022 ($200m). While there has been a similar drop-off in sustainable equity and bond flows over the period, these have picked up from Q3 of last year, although the same isn’t in evidence for MA.

Chart 4: Global Sustainable Mixed Asset Flows ($bn)

Source: LSEG Lipper

What’s of note is that the most popular funds of these two promoters struggled in terms of performance relative to benchmark in 2022 after generally much stronger preceding periods. What’s also of note is that this performance has recovered year to date.

Are we then seeing a significant lagging performance effect on flows from those names most closely associated with ESG MA? If that is the case, how long will it take flows to rebound in the wake of performance—should it be sustained? What is surprising is that this does seem to be a stronger effect than seen in either equity—by far the largest ESG market—or bond ESG fund markets.

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